Every time crude oil spikes and diesel prints a terrifying number at the pump, a parade of economists appears on financial television to deliver the same reassuring talk:
“Direct energy costs only make up roughly 3% to 5% of the average business’s operating expenses. The headline pass-through will be negligible.”
On paper, looking at a neat single-column income statement, that sounds reasonable.
In the real world—where people actually make physical goods, haul freight, and try to sell pints of beer to working humans on a Friday night—it is complete nonsense.
If you look at my small craft brewery through that sanitized lens, the economists are technically right. My direct fuel bill is basically zero. I don’t own a fleet of 18-wheelers. Once or twice a week, I drive my personal vehicle to pick up supplies or cider, and I cut myself a standard mileage reimbursement check at the IRS rate. Whether gas is $3.20 or $5.50 a gallon barely registers on my monthly P&L.
Case closed, right? Transitory. Minimal impact.
Except anyone running a small business knows that fuel isn’t just an expense line item. It’s the invisible tax embedded in every single physical atom delivered to your loading dock.
The Food Chain Problem
Before I spent my days mashing grain and filling kegs, I got an undergraduate degree in Natural Resources Management, an offshoot of Biology. One of the central concepts you learn early in ecology is bioaccumulation (and its cousin, biomagnification).
The mechanics are simple: micro-organisms absorb tiny traces of a heavy metal or toxin from their surrounding environment. A small fish swims along and eats thousands of those micro-organisms, concentrating the poison in its fatty tissue. Then a mackerel eats twenty small fish. Then an apex predator—a tuna or an osprey—eats the mackerel.
By the time the toxin reaches the top of the food chain, what started as a few harmless parts per billion has compounded into a lethal, concentrated dose.
Energy shocks operate under the exact same biological law.
Fuel is the economic pollutant. And small, end-stage producers sit squarely near the top of the trophic pyramid.
Consider what it takes to get a single 55-pound sack of two-row malted barley to my brewhouse floor:
The Farm: It starts in Montana or Idaho. A farmer fires up a massive combine harvester that burns roughly 20 to 25 gallons of off-road diesel per hour under full load. When diesel spikes to historically painful levels, the farmer doesn’t have the luxury of switching to solar-powered combines. Fuel is one of their single largest direct cash outlays.
First Transit: That harvested grain gets loaded onto a heavy freight truck or a diesel locomotive to reach a regional processing terminal.
The Malt House: Barley doesn’t turn into beer malt by sitting in the sun. It has to be soaked, germinated, and then dried in massive industrial kilns using gargantuan fossil-fuel-powered blowers running around the clock.
Long-Haul Freight: The finished malt is bagged, palletized, and loaded onto an interstate semi-truck traveling 1,500 miles on expensive diesel to reach a distribution hub.
The Last Mile: Because I’m a local independent brewery and don’t buy grain by the trainload, my order ships “LTL” (Less-Than-Truckload). That means another diesel truck drops it at a local freight transfer terminal, where workers forklift it onto a final delivery box truck, which navigates local traffic to my receiving door.
By the time that malt arrives at my kettle, diesel hasn’t hit me once. It has hit me six separate times. Every entity along that chain was forced to either swallow a hit to their gross margin or tack on an energy surcharge.
And if you think a craft brewery has it rough, consider the neighborhood steakhouse down the street. For them, that grain journey is merely Step One. That grain gets fed to a steer for two years, compounding the feed freight, the cattle hauling, the climate-controlled meatpacking facility, and refrigerated freight. They are three full trophic levels higher up the food chain than I am.
The Fed’s Sledgehammer
This brings us to the macroeconomic punchline.
Whenever oil surges on the back of geopolitical conflict or refining bottlenecks, the financial press immediately pivots to Federal Reserve tea-leaf reading. Will they hike 25 or 50 basis points? Will they stay higher for longer?
Let’s be honest about what interest rate hikes actually do.
Kevin Warsh cannot drill an oil well in the Permian Basin. A 5.5% Fed Funds rate does not lower the price of diesel at a truck stop in Nebraska, nor does it make an interstate freight route consume fewer gallons of fuel per mile.
What rate hikes do accomplish for main street business owners is brutally simple: they make our floating-rate capital significantly more expensive.
Most small manufacturers and retail operators rely on revolving lines of credit (LOCs) to smooth out inventory cycles, or short-term equipment notes to replace a busted chiller or packaging machine. When the Fed hikes rates to curb commodity-driven inflation, they don’t fix the combine harvester’s diesel bill. They simply ensure that when we draw on a credit line to pay for that grain, our borrowing cost is 9% instead of 4.5%.
It’s like treating an infection by intentionally raising the patient’s blood pressure.
The PepsiCo Playbook vs. The Local Taproom
The current cycle has an even weirder wrinkle. Over the past few years, corporate America mastered a very specific playbook: Price over Volume.
During the initial post-COVID supply crunches, consumers were conditioned to expect higher prices everywhere. Big Consumer Packaged Goods (CPG) companies—the Frito-Lays, the Pepsis, the consumer conglomerates—figured out that they could hike prices well ahead of their actual input cost inflation, blame it on the headlines, and watch their operating margins expand to record highs.
When input costs eventually plateaued, did prices come down? Of course not. They kept the spread.
Go look at the grocery store shelf next time you buy snacks for a football game. A 12-pack of soda and two family-sized bags of Doritos will easily set you back nearly double what you paid in 2019. There are essentially two or three dominant players in those categories. They have pricing power, wide distribution moats, and consumers who grumble but swipe the card anyway.
Main Street businesses don’t have that moat.
In 2019, the average pint of craft beer on our board was $5.50. If I used the big-box snack-food playbook to match the cumulative inflation on our raw goods, non-tangibles, commercial property insurance, and municipal electricity rates, I would need to charge $11.00 for an IPA.
Try charging eleven bucks for a draft beer at a neighborhood joint on a Tuesday night. Your customers will walk out the door and drink macro-lagers at home.
Today, my average pour sits just under $7.00. We absorbed the rest.
The large distributors and industrial suppliers sitting in the middle of our supply chain have enough accumulated margin cushion from previous price hikes to sit tight through short-term fuel shocks without panicking. But if elevated energy costs linger, their margins will compress, and their surcharges will return.
When those surcharges arrive at my side door, I have nowhere left to pass them. The customer at the end of the bar has a finite paycheck, higher rent, and their own gas tank to fill on the commute home.
Direct fuel costs might look like a footnote in a macroeconomic model. But out here in the real economy, it is the tide that lifts all costs—and leaves the smallest boats stranded on the rocks.