The Fuel Surcharge That Never Fades
Examining how oil shocks and “sticky” corporate margins create permanent cost shifts for small businesses.
I’m sitting here on spring break, coffee in hand, looking out over the water from my hotel in Clearwater Beach. I should probably be enjoying a mimosa, but instead I’m reading a multi-sector inflationary dynamic paper from the Brookings Institution. I know—I’m a real blast at parties.
But when you’re an owner, you have to keep an eye on the horizon. The “macro” is just a fancy word for the truck that will eventually back up with your delivery. And right now, the indicators are starting to flash.
The Rocket and the Feather
We’ve all seen the headlines. Conflict in the Middle East kicks off, and gas prices go vertical. It’s what economists call the “Rocket.” Prices shoot up because refiners are panicking. A recent piece in the Wall Street Journal highlights a massive disconnect in the market right now: while “paper” futures for crude are bouncing around the high $90s, the “physical” market is in a total frenzy. Refiners are actually shelling out as much as $145 a barrel on the spot market just to guarantee they have actual product to refine.
But then, a tentative cease-fire is announced. You’d think the price would crater, right? Wrong. That’s where the “Feather” comes in. Retail prices float down slowly—if they come down at all. Gas station operators and the big corporate suppliers above us are in no rush to pass those savings along. They’ve just spent weeks with their margins getting absolutely crushed by that $145 wholesale spike, so when costs finally dip, they hold the line to expand their margins and recoup their losses.
While I haven’t seen the invoices jump at the brewery yet due to the situation with Iran, this cycle usually means it’s only a matter of time before those “fuel surcharges” start appearing on the bottom of my supply orders.
The Ripple Effect: Why Diesel is the Real Killer
It’s easy to look at a gas station sign and think, “Well, I don’t drive that much.” But in the world of illiquid assets, every single thing you touch is moved by diesel. And diesel right now is a nightmare—hitting astronomical levels in places like California.
I’ve seen this movie before. We saw it with COVID. A shock hits the system, and suddenly every invoice has a “shipping surcharge” or a “logistics fee” tacked onto it. Those fees are like a guest who shows up to your party, drinks all your beer, and then decides to move into your guest room permanently. They don’t go away.
Take grain. In our industry, grain is a commodity. When the brewing industry shrinks—which it is—demand destruction usually keeps those prices somewhat under control. But even if the price of the grain itself stays flat, the cost of farming it, harvesting it, and trucking it to my door is tied to the price of fuel.
When the oil shock recedes, the big multi-national suppliers aren’t always quick to send out “we’re lowering your rates” emails. They often pocket the difference as margin. Meanwhile, I’m the one eventually standing in the taproom having to explain to a regular why their favorite IPA just went up another dollar.
The Brookings Reality Check
This is exactly what Afrouzi and Bhattarai were talking about in the paper I’m currently reading. They talk about a “multi-sector” economy where some sectors are “flexible” (like energy) and others are “sticky” (like us).
When a productivity shock hits an upstream sector—like a war-induced energy spike—it forces a realignment of relative prices across the whole economy. Even if the Fed manages a “soft landing” and unemployment stays low, inflation can stay elevated because the “downstream” sectors—that’s us—are still trying to adjust to the new reality of our input costs.
Inflation isn’t just about “too much money chasing too few goods.” Sometimes it’s just the visible footprint of an economy trying to figure out how to function when the cost of moving things from point A to point B has fundamentally shifted.
The Death Warrant
There are those in my industry that are not going to want to hear this. Eating all of these hikes and protecting your price point isn’t the solution.
There are breweries all over the country right now that are terrified. They see the shrinking market and the rising costs, and they react by trying to be the “value” play. They keep their prices at 2019 levels, despite post-COVID inflation and now this next price shock, thinking that volume will save them.
It won’t. It’s a death warrant.
When you keep your prices artificially low while your suppliers are expanding their margins at your expense, you aren’t being a “friend to the consumer.” You’re just subsidizing your own bankruptcy. You are signing your own death warrant with margins that are too thin to sustain a single equipment failure, let alone a prolonged economic shift.
Worse, you’re often confusing the customer. When a struggling brewery nearby sells a dumbed down IPA for $5 made with closeout hops from the 2021 crop year because they are a “steal” at $3 per lb, it’s bad for everyone. This super “mid” product impacts not only that brewery’s reputation, but makes the customer question why my IPA is $7. It might have something to do with higher quantities of $18 per lb specialty hops from the 2025 crop year we are using. But to the casual customer who isn’t a beer geek (80% of our customers), we look expensive.
Ownership is About Hard Choices
Being an owner means you don’t get to live in the “paper” world of futures markets and economic theories. You live in the “physical” world of real-world shipments and bank balances.
The ripple of an oil shock isn’t always a one-time event; it can be a structural change to your cost of goods sold. You can either adjust your prices to reflect that reality, or you can watch your equity evaporate while you wait for “things to get back to normal.”
Spoiler alert: they rarely go back to exactly where they were.
Now, if you’ll excuse me, my coffee is getting cold and I have more “riveting” reading to do here in paradise.
Macro Views, Micro Brews. And this morning, Beautiful Views.
Dave