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How oil costs affect product prices

POSTED ON AUGUST 26, 2022    

With all the recent discussion over the Russia-Ukraine war, you may have heard how the prices of many products became affected. In particular, the worldwide supply of oil shrank due to sanctions imposed on Russia.

 

The relationship between oil and items like noodles and soap may not be immediately apparent, but there’s actually a strong connection between them and other products as well. There are two main reasons for that, and you’ll find out what they are in this article.

 

Manufacturing

When companies determine how much their products will be sold for, possibly the most important consideration is how much it costs to make each one. After all, if the products are sold for less than it takes for production, that would cause the companies to operate at a loss.

 

Oil is a big factor in manufacturing, because it is typically one of the two major sources of power for factories (the other being natural gas). When its prices go up, each product becomes more expensive to produce, and such costs usually end up being passed on to end consumers.

 

Also, even the costs of raw materials used to make the finished products can be affected by higher oil prices. For example, growing wheat for pasta and raising cattle for meat requires fuel-using equipment, especially for the bigger companies.

 

Now, price increases don’t always happen, and they usually aren’t immediate. If the supply of fuel is only temporarily disrupted, or if the product’s price allows the company to absorb the higher cost while still making a profit, the organization may choose to not make an upward adjustment.

 

Transportation

Transportation happens very early in the production process, from when the raw materials and assembled components are delivered to the factory. It also happens at the end, when finished products are transferred to warehouses and eventually points of distribution and sale.

 

Both processes require oil, in its processed forms of gasoline or diesel. Unlike factory operations, there aren’t many real alternatives for these fuels for such uses just yet.

 

These costs are also always considered when determining prices, and so increases in oil prices may indeed result in more-expensive products. Of course, the factors of how much oil prices rose and how long they’re expected to stay elevated will be looked at first.

 

What it means for consumers

While oil prices hikes can have a direct effect on the lives of consumers by making gasoline and diesel more expensive, they may also be indirectly responsible for products becoming more expensive.

 

Since they’re determined by the cause and severity of the fuel increases, there is no typical duration for these higher product prices. Even when oil costs go down, there’s no guarantee that products will also drop right away.

 

When many products become more expensive as a result of higher production expenses, this can lead to a form of inflation, specifically the cost-push type.

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