Middle East War Forces a Pricing Response

The current war in the Middle East will raise input costs substantially for manufacturers globally for the foreseeable future. If your company hasn’t already planned price increases, it should prepare now for this supply shock across many key inputs.

Energy is the most commonly discussed cost issue, but it is not the only concern producers should have.

Consumers across the globe are wondering how fuel prices will go and for how long. Airlines are reducing flights and raising prices faster than motorists are affected at the pump. This situation is likely to get worse long before it gets better.

Take a simple metric of the price elasticity of demand and the reduction of oil available on the market, and the impact can be estimated. Rough estimates put the short-term price elasticity of demand for oil at -0.05. Globally, the demand for oil is highly inelastic. Though 20% of the global oil supply routinely flows through the Strait of Hormuz, the closure is increasing reliance on alternative ports and pipelines. Rough estimates imply a 15% reduction in global oil supply today. Using the definition of the price elasticity of demand and these rough estimates, we can anticipate the price of oil to shoot up 300%. If the pre-war price of oil was $70 per barrel, the wartime price of oil can be predicted to increase to $280 per barrel. That implies a roughly fourfold increase in the price of gas from around $3.50 per gallon in the U.S. to $14.00 per gallon. Different estimates will deliver different numbers, but all reasonable estimates agree on the direction and impact. Oil, gas, and jet fuel should be anticipated to increase significantly in the near future as reserves are depleted and the full market forces on the price of oil are revealed. There are already reports of crude prices near this estimate.

Some have posited that all would quickly return to normal if the Strait of Hormuz were opened. This is wishful thinking. The delay in relief from high oil prices will be measured in months, not days.

Several challenges predict a slow decrease in the price of oil. One, logistics. It takes two to five weeks for oil to leave the Gulf Coast Countries and reach its market. This is followed by refining and processing, some of which capacity has been shuttered and will take time to restart and produce product. Two, some of the oil pumping, transporting, and refining infrastructure has been damaged and will take months to years to repair. Three, reserves are being depleted and will need to be refreshed to address potential future calamities. Conservative estimates suggest a three-month delay between the end of this Middle East conflict and the start of energy price normalization.

Beyond oil, the Middle East conflict is also affecting other products produced in the Gulf Coast Countries, including fertilizer, aluminum, copper, and helium. Urea, a key fertilizer, is up by 40% since the start of the conflict. Aluminum is up from a prewar price of $2,100 per metric ton to $3,500 per metric ton in May 2026, a 67% increase. Copper is up from a prewar price of $8,500 per metric ton to $12,500 per metric ton in May 2026, a 47% increase. Spot prices on helium are estimated to rise by 50% to 200%.

These supply shocks will have a significant impact on a broad array of producers, from food and technology to most other manufactured products.

Producers cannot cover these costs. They must pass them through. This means raising prices.

If you are a producer being impacted by rapidly increasing costs, the best practice is to pass through the cost increases so that the contribution profit remains constant. This implies gross margins will shrink, but overall profits will remain constant if demand does not change. Which leads to the second expectation: as producers raise prices, they should anticipate a decrease in demand. When predicting the impact on demand of a price increase resulting from a cost increase affecting all competitors in a market, the industry-level price elasticity of demand, not the brand-level price elasticity of demand, should be used. As to timing, best practices also indicate they should be implemented in parallel with the observed cost increase. Executives routinely express regret when they delay action.

If you are a consumer of any product being impacted, and we all are in multiple ways, prepare for sharp and broad price increases and difficult financial choices.

Pro-tip: beans are cheap and nutritious.