Fuel price hikes aren't quite what you think

You’re probably cursing Iran at the moment for blocking the Straits of Hormuz. But that feels distant. What you’re really cursing is the fuel retailer down the road—and the government for not keeping enough in reserve.

Strategic reserves sound reassuring, but they are not a solution. They are a delay. Wars can last years—decades, even. Most reserves last weeks. And when they run out, the same question remains: who gets what?

Fuel stations, meanwhile, seem like the obvious villain. Prices jump overnight and the instinctive response is: how can that be justified when they haven’t yet bought new stock at higher prices? It’s a fair question—but not an informed one.

To understand what’s happening, it helps to look at the work of Isabella Weber, whose research focuses on price shocks and how they ripple through an economy.

Part of her thesis is that firms engage in protective pricing—raising prices not to profiteer, but to avoid future losses.

Here’s how that works in the current context.

A supply shock sends global oil prices soaring. Buyers who depend heavily on oil will pay whatever it takes on the spot market. Everyone else absorbs the increase.

Fuel retailers know that when they restock, they will be paying more. If they continue selling current inventory at old prices, they risk being squeezed—or wiped out—when replacement stock arrives at higher cost.

So they raise prices immediately.

For small operators, this is not optional. They carry limited stock, operate on thin margins, and rely on volume. If supply tightens and volumes fall, profits shrink. If supply stops altogether, revenue drops to zero.

Seen this way, immediate price increases are not necessarily gouging. They are a hedge against uncertainty.

Gouging looks different. It occurs when firms with secure supply or large inventories raise prices simply because they can—because the usual discipline of competition weakens during a shock. Consumers expect prices to rise, competitors follow suit, and resistance fades.

Hoarding amplifies this effect, tightening supply further—much like the rush on toilet paper during COVID.

Expectations also change behaviour. A modest increase in price can trigger a disproportionate shift. People carpool, reduce trips, or change habits. What was once inconvenient becomes rational. As behaviour adjusts, higher prices become more tolerable—and less contested.

Small fuel retailers are not structured to profit from this. Fuel is typically sold on slim margins. The real profits come from convenience goods—food, drinks, impulse purchases. When fuel prices rise, it is often a cost pressure, not a windfall.

In economic terms, this process is known as replacement cost pricing—setting prices based on expected future costs rather than past costs. It is difficult to execute well. Without sophisticated modelling, most operators rely on rough judgement—and that judgement is often wrong, as business failures during shocks attest.

Two dynamics sit behind this:

Price prediction under uncertainty: the less certain future supply, the greater the risk of mispricing
Timing asymmetry: prices must anticipate future costs, not reflect past ones

Most firms are not well equipped to manage either.

Weber observed during COVID that some firms raised prices in anticipation of shortages that never materialised, while others did so simply because consumers were willing to pay more.

What begins as protective pricing can drift into opportunistic margin expansion.

Her explanation is simple: when everyone expects prices to rise, consumers tolerate increases and firms move together. Prices overshoot what is strictly necessary, and if those higher prices hold, they become the new baseline. Weber describes this as implicit coordination—not deliberate collusion, but a shared response to uncertainty.

Consider a simpler example. A contractor quotes to build a fence but includes a clause allowing for fluctuations in steel prices. You accept this without protest. It’s not exploitation—it’s risk management. The contractor cannot absorb a sudden spike in input costs.

Weber’s proposed response is more interventionist.

First, radical transparency. In a targeted sector like fuel, firms would be required to publish real-time price breakdowns on a government-managed platform.

Second, a cost-based price band:

Retail price = (import parity price + refining + logistics + tax) ± allowed margin range

Third, strict penalties for unjustified margin expansion—not for high prices themselves, but for profits that exceed what costs justify.

Alongside this, governments could stabilise prices through mechanisms like excise adjustments, rather than blunt tax cuts. Where small operators face genuine hardship, support could be automatically triggered using real-time data.

Over time, similar frameworks could be applied to any sector vulnerable to shocks.

Longer-term solutions—such as electric vehicles or expanded public transport—may reduce exposure to volatility. But they do little to address the immediate problem.