Retail fuel prices surge across euro area after Middle East conflict
Retail fuel prices have surged across the euro area in 2026 following the outbreak of the conflict in the Middle East, driving up energy inflation and prompting fresh analysis from European Central Bank (ECB) experts on how crude oil costs feed through to what consumers pay at the pump. In…
Retail fuel prices have surged across the euro area in 2026following the outbreak of the conflict in the Middle East, driving up energy inflation andprompting fresh analysis from European Central Bank (ECB) expertson how crude oil costs feed through to what consumers pay at the pump. In a blog post, economists Friderike Kuik, Eliza Lis, Christiane Nickel and Mario Porqueddu,examined the factors that drive fuel price dynamicsand explained why a10 per cent increase in oil pricesdoes not automatically translate into a10 per cent increase at the petrol station. Prices for refined fuel and crude oilmove pretty much in lockstep from month to month, although refined products, in particular diesel, have outpaced crude at times since 2022,signalling the role played by refining margins. Prices for Brent crude rose rapidly in March afterthe outbreak of the conflict in the Middle East, peaking at138 US dollars per barrel in early April, almost double the level seen in late February. On this occasion,prices of diesel after the refining process rose even faster than prices of crude oil, peaking at197 US dollars per barrel in April, resulting in ever higher prices at the pump. By the first week of April,retail diesel prices averaged €2. 18 per litreacross the euro area compared with€1. 63 per litre in late February, a sizeable jump of a third. Rising crude oil prices thusfed quickly into rising consumer prices, as they usually do, withthe pass-through generally fast, within one or two months, and complete. Rather than being absorbed by lower profit margins,an increase of €0. 10 per litre in crude oil pricesusually translates intoan increase of €0. 10 per litre in pre-tax pump prices. While the pass-through from oil prices to pump prices is complete in levels,in relative terms retail prices increased less, as a large share of the retail price is fixed anddoes not move with oil market prices. The prices of crude oil and refined dieselrose by over 90 per centbetween the end of February and the first week of April, whereasdiesel prices at the pump increased by around “only” 34 per cent. Similar dynamics applied to petrol, withprice elasticities varying along the five componentsthat make up the price at the petrol station. Crude oil ishighly sensitive to both supply shocks, like the Middle East conflict, anddemand shocks, like the COVID-19 pandemic, and since 2021 the crude oil component hasaveraged around €0. 47 per litre of diesel, ranging from€0. 28 to €0. 80. At its most recent peak in the first week of April,it reached €0. 73, a92 per cent increasecompared with the end of February. Refining costs and margins are calculated asthe difference between the contribution of refined product prices and the contribution of crude oil prices, capturing the additional costs and gross margins associated withall steps between crude oil arriving at the refinery and usable fuel leaving it. In the last week of February,they contributed €0. 13 to the retail price of diesel, in line with the historical average from 2021, but this price componentwas amplified during the recent energy shock, with a168 per cent increasecompared with the end of February. Distribution costs and marginscover all activities between refining and the final sale, including transporting the product to the local retail outlet, marketing expenses andthe costs of operating the outlet, such as rents and wages. Distribution marginsabsorbed part of the increase in diesel refining, falling by14 per centcompared with the end of February. Excise duties aretaxes levied at a fixed amount per litre that rarely changes, averaging€0. 52 for diesel and €0. 66 for petrolin the euro area since 2021. Several countries havetemporarily cut excise dutiesto dampen the inflationary impact from the energy shock for consumers, as they did after Russia invaded Ukraine, and these dutiesdeclined by around 8 per centcompared with the end of February. In most cases,the latest measures expired in June this year. Value added taxes arelevied as a fixed percentage of the pre-tax consumer price and excise duties, currently around19-22 per cent in most countries, and thus rise and fall with the pre-tax price butadd no independent volatility. VAT accounts forroughly one-sixth of the retail price, and the VAT componentincreased by 24 per centcompared with the end of February, hence less than the retail price percentage change due toa cut of around 8 per cent to the average VAT rateacross the euro area, from20. 7 per cent to 18. 9 per cent. As excise duties and VAT togethermake up a big, largely fixed share of the price, a given percentage increase in crude oil pricestranslates into a much smaller percentage move at the station. The renewed escalation of the conflict since early Julyhas pushed pump prices back up, to around€1. 98 per litre of dieselin the third week of July, withrefining margins again playing an important role. This time, refining margins made a difference, asthese margins may vary for a number of reasons, including the varying refining processes according to the refined product requirements andthe type of crude oil used, and the varyingsupply of and demand for various refined products. In the case of the recent energy shock,the closure of the Strait of Hormuz has affected a significant share of global refining capacity, essentially leading to a decline in global refined-product exports ofaround 4. 5 million barrels per dayin the second quarter of 2026. This sharp supply crunchresulted in rapidly widening refining costs and margins, jumping from a monthly average of€0. 10 per litre of diesel in February to €0. 26 in March. More recently, the renewed escalation of the conflicthas led to another surge in refining costs and marginsto near-record highs amid reduced refining capacity,contributing €0. 35 to the diesel price and €0. 23 to petrolfor the first three weeks of July. Looking ahead, based on refined diesel futures on July 20, 2026,the contribution from margins is expected to peak in Augustbefore declining to€0. 16 by the end of 2027, close to levels observed at the end of February 2026. Crude oil pricesfell significantly during the recent short-lived reopening of the Strait of Hormuzfrom June 18, 2026, to July 11, 2026, andretail diesel prices followed suit. Over the last few decades the“rockets and feathers” literaturehas discussed whether there isany evidence of asymmetry, whether retail prices fall less quickly when oil prices come downcompared with how fast they rise when oil prices go up. Earlier studies for the euro areafailed to find any asymmetriesor the overall picture was inconclusive, but more recent work suggests thatthe pass-through could be slower on the way down. This could reflectlags in inventory replacement, uncertainty about the persistence of crude oil price changes orweaker competitive pressure when costs decline. Further analysis is therefore needed toestablish whether and why asymmetries were observedduring the recent shock. The Middle East oil price shockhas been significant and had a marked impact on retail fuel prices, withrefining margins amplifying the effect. Overall, the Harmonised Index of Consumer Prices for fueldrove the increase in the HICP for energy from -3. 1 per cent to 10. 8 per centbetween February and May 2026 before itdeclined to 8. 5 per cent in June. As observed in the past,increases in the prices of crude and refined fuels passed through to retail prices rapidly, whiletemporary reductions in excise duties and taxeshelped to alleviate the burden on consumers. When oil prices fell during the brief reopening of the Strait of Hormuz,pressures on retail fuel prices eased to some extent. The renewed escalation of the conflicthas led to another sharp rise in fuel pricesreflecting not only higher crude oil prices but alsosurging refining margins.