International oil prices surge, revealing the "butterfly effect"

Ask AI · What are the long-term impacts of fuel price subsidy measures on government finances?

As volatility in the global energy market intensifies, the affected parties are no longer just those countries with skyrocketing oil prices. Soaring transportation costs are rapidly spreading to the consumer end. In the face of dramatic swings in fuel prices, governments around the world are trying to roll out measures to cushion the impact of fuel prices surging on ordinary people’s lives. However, the world is paying an increasingly steep price for shielding economies from what may be the most severe energy shock in decades. Subsidies for oil prices in various countries are the first to place a heavy fiscal burden on governments.

Cost transmission to the consumer end

With the Middle East situation in the background, oil prices have remained in a high-range oscillation. Its ripple effects are gradually seeping into every layer of daily life. Amazon recently confirmed to the media that it will temporarily charge a 3.5% fuel and logistics surcharge starting April 17 for third-party sellers using its platform. It is understood that Amazon’s fuel and logistics surcharges will apply to U.S. and Canada sellers using its “Amazon Logistics” service. Starting May 2, the surcharge will also apply to sellers using “Prime Shopping” and “Multi-Channel Fulfillment” services.

In an email statement, Amazon said: “The rise in fuel and logistics costs has already driven up the operating costs across the entire industry.” Amazon said that to date it has been absorbing these costs on its own, but like other major carriers, when costs remain elevated for an extended period, the company will implement a temporary surcharge to partially offset these expenditures. The company also noted that this charge is “clearly lower” than the surcharges collected by other major carriers.

It is understood that more than 60% of products on the Amazon platform come from independent sellers. These sellers must pay Amazon sales commissions and warehousing and fulfillment fees. Analysts point out that because sellers’ profit margins are limited, this incremental cost will very likely be converted into higher product prices, paid for ultimately by end consumers.

“Well, prices at the shelf haven’t gone up yet, but costs have gone up first.” A seller lamented. “The 3.5% surcharge really makes many sellers uncomfortable. They say it’s a temporary surcharge, but most likely once it goes up, it won’t come back down. For low order value, low-margin products, the extra 3.5% cost could significantly squeeze profit margins.”

It’s not just Amazon—an increasing number of carriers are starting to impose surcharges to make up for rising energy costs. United Parcel Service (UPS) and FedEx have already raised their fuel surcharges. The U.S. Postal Service announced last week that it will charge an 8% fuel surcharge on parcels shipped starting April 26, and said the measure will last until January 17, 2027.

In addition, United Airlines has also officially announced that, affected by persistently rising fuel prices, it will increase baggage handling fees for domestic flights within the U.S. and on some international routes. Starting April 3, for passengers traveling on United Airlines to and from within the United States, Mexico, Canada, and Latin America, fees for their first and second checked bags will increase by $10 across the board.

Jiang Han, a senior research fellow at PanGu Think Tank, said that from the cost transmission mechanism, this price increase is directly linked to the rise in oil prices. Road freight, air freight, and the express delivery industry share a fuel cost structure; when oil prices rise, transportation costs will directly increase.

Multi-country responses to high oil prices

Beyond transportation and household energy spending, the impact of high oil prices is spreading further to food and the manufacturing sector. Rising natural gas prices increase fertilizer costs, which in turn pushes up food prices. At the same time, in many countries in Asia and Africa that heavily rely on importing Gulf crude oil, these energy costs ultimately feed through to the prices of exported goods, logistics fees, and the prices of everyday consumer goods.

A report and analysis by the British Broadcasting Corporation (BBC) said that for every $10 increase in international oil prices, gasoline prices typically transmit to retail endpoints in about two weeks. Meanwhile, natural gas prices are also climbing, and household energy bills, food prices, and manufacturing costs may face further pressure.

In Asian countries that rely heavily on energy supplies from the Middle East, measures to save fuel and impose driving restrictions are being continuously upgraded. In the Philippines, diesel prices have recently risen to more than double compared with the end of February, and liquefied petroleum gas prices have increased in sync. Restaurants and vendors that rely on liquefied petroleum gas say their costs are constantly rising and they are very worried that someday they won’t be able to make ends meet.

In Japan and South Korea as well—two Asian countries that also rely heavily on Middle East crude oil—people have fully felt the impact of “Middle East premiums.” One Japanese taxi driver said that he finds it especially difficult to cope with the rise in oil prices. Recently, the South Korean government officially implemented a “oil price cap” system, marking the first time in nearly 30 years that South Korea’s government has adopted such a system. The plan shows that the government sets a price cap on oil products supplied by refineries to gas stations and distributors, and adjusts it every two weeks in line with movements in international oil prices.

In fact, countries in Europe and the U.S. have not been spared either, facing shocks such as a sharp increase in travel costs caused by soaring oil prices. In the United Kingdom, gasoline prices have risen to a level not seen in 18 months. The government said that if it finds gas stations taking advantage of the situation to reap excessive profits, it will be prepared to take intervention measures. For low-income households that rely on fuel oil for home heating, the UK has opened a support program totaling £53 million to ease pressure on energy spending.

Fiscal burdens increase

However, the world is paying an increasingly steep price to protect economies from what is the most severe energy shock in decades. Subsidies for oil prices in various countries are the first to create a huge fiscal burden for governments. As of 2024, global public debt increased from $97 trillion in 2023 to $102 trillion. The International Monetary Fund warns that postponing necessary domestic price adjustments can relieve public pressure in the short term, but may damage fiscal revenues and increase risks related to inflation and exchange rates.

Dong Zhongyun, chief economist at CICC Securities, analyzed that oil price intervention measures usually put pressure on fiscal budgets, but the form that the pressure takes differs significantly depending on the policy tools used. Direct subsidies and tax cuts are fiscal interventions and directly reduce fiscal revenues; pure price controls are administrative interventions. On the surface, they do not directly generate fiscal spending, but they can still trigger negative consequences such as supply shortages, cross-border arbitrage, and distortions to market structures.

“Countries with a high dependence on energy imports and already relatively high domestic fiscal pressure may have an even more prominent deficit pressure, especially Japan, South Korea, India, and others.” Mingming, chief economist at CITIC Securities, said. The United States, as an energy power, has relatively limited exposure to how the U.S.-Iran conflict affects it compared with countries in Asia and Europe, but the rise in crude oil prices will still increase price pressures for U.S. gasoline and the like, thereby delaying expectations of Federal Reserve rate cuts, raising U.S. Treasury yields, and further intensifying the United States’ fiscal deficit pressure.

At present, developing countries’ debt is generally considered more fragile. Mingming explained that the U.S.-Iran conflict has a greater energy shock impact on Asian countries, and with increased uncertainty in the global trade environment on top of that, countries with high energy dependence and high fiscal deficit pressure and high external debt repayment pressure are expected to suffer negative shocks earlier and more severely in this round of the U.S.-Iran conflict. At the same time, intensified geopolitical conflict reduces global risk appetite, drives a rebound in the dollar, and causes capital to flow out of developing countries; this also leads some developing countries to face debt risk problems arising from currency depreciation and imported inflation pressure.

Beijing Business Daily reporter Zhao Tianshu