How Higher Gas Prices Fuel the Rising Price of Goods

A recent report found that nearly 70% of small and medium-sized businesses across the country cited high gas prices as the reason they were struggling to regain stability—and the struggle is real.

U.S. gas prices have been volatile to say the least over the last couple of years in particular, from a low of less than $2 per gallon in April 20201 to a record high ($9.60 per gallon at a California station in June 2022), before dipping again over the last two months to an average $4.16 a gallon, according to a pricing report by the Automobile Association of America.2  Gas prices and their effect on the price of goods have their roots in the behavior of the petroleum and crude oil sector; however, in the months after the COVID-19 lockdown, a perfect storm of disparate events occurred that also escalated prices.

A Series of Unfortunate Events

U.S. oil refineries—unsure of their ability to recover from the one-two punch delivered by COVID and the growing electric car market—cut gas production drastically and shuttered some refineries for good, resulting in a nearly 5% reduction in the nation’s oil refining capacity. A freak deep freeze in Texas followed in February 2021, causing more oil refineries to close. Oil-rich Russia invaded Ukraine in February 2022, straining the global oil supply.

In the United States, many embraced the “new normal” and resumed on-site work, travel, and social interactions. Oil refineries were unprepared to meet the renewed demand, estimating they need 6-12 months to shift gas production into high gear.3

This convergence caused a sharp increase in oil prices, which in turn raise fuel prices, leading to cost increases for energy-intensive businesses (e.g., aviation, shipping, trucking, rail) that transport goods to market. This means many industries (e.g., food, travel, and hospitality) relying on transporters are also feeling the pinch of higher energy prices.

Coping Strategies

Some sectors will survive by passing on price increases to their clients. Others may lower production levels while prices are high (possibly contributing to supply chain shortages), and others may reduce their profit margins.

Example of a Prime Casualty: Restaurants

In the restaurant industry, already challenged with higher wholesale food and delivery costs, quick-service and fast-casual dining providers are among the most affected as those are the first cuts consumers typically make in a gas price crunch. That’s in contrast to fine dining restaurants, for which no change is expected (more affluent patrons; consumers marking a special occasion rationalize the splurge).4

Restaurants offering delivery face an additional challenge—how to compensate their delivery drivers for the higher gas costs they’re incurring. Delivery companies such as DoorDash and Uber Eats are offering drivers additional reimbursement of up to 10 percent cash back on gas.

Buying Behavior Changes

Already dealing with high inflation and rising interest rates, consumers paying more for gas have less discretionary income. This forces a behavioral change starting at the pump, where 44% of drivers said they now stop at the halfway mark when getting gas. Shocked by price increases in everything from eggs to airline tickets—up 40% and 25% respectively since last year, consumers are reducing unnecessary driving and eating out less.5

Higher Energy Prices Are the New Normal

With analysts anticipating energy costs to remain high for at least the next two years, companies (especially those with brick-and-mortar entities) must raise the bar with distinctive products and services, entice additional traffic, and provide superior customer service to convince customers they’re worth the drive.