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 a blog post, economists Friderike Kuik, Eliza Lis, Christiane Nickel and Mario Porqueddu, examined the factors that drive fuel price dynamics and explained why a 10 per cent increase in oil prices does not automatically translate into a 10 per cent increase at the petrol station. Prices for refined fuel and crude oil move 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 after the outbreak of the conflict in the Middle East, peaking at 138 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 at 197 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 litre across the euro area compared with €1.63 per litre in late February, a sizeable jump of a third. Rising crude oil prices thus fed quickly into rising consumer prices, as they usually do, with the 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 prices usually translates into an 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 and does not move with oil market prices. The prices of crude oil and refined diesel rose by over 90 per cent between the end of February and the first week of April, whereas diesel prices at the pump increased by around “only” 34 per cent. Similar dynamics applied to petrol, with price elasticities varying along the five components that make up the price at the petrol station. Crude oil is highly sensitive to both supply shocks, like the Middle East conflict, and demand shocks, like the COVID-19 pandemic, and since 2021 the crude oil component has averaged 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, a 92 per cent increase compared with the end of February. Refining costs and margins are calculated as the difference between the contribution of refined product prices and the contribution of crude oil prices, capturing the additional costs and gross margins associated with all 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 component was amplified during the recent energy shock, with a 168 per cent increase compared with the end of February. Distribution costs and margins cover all activities between refining and the final sale, including transporting the product to the local retail outlet, marketing expenses and the costs of operating the outlet, such as rents and wages. Distribution margins absorbed part of the increase in diesel refining, falling by 14 per cent compared with the end of February. Excise duties are taxes levied at a fixed amount per litre that rarely changes, averaging €0.52 for diesel and €0.66 for petrol in the euro area since 2021. Several countries have temporarily cut excise duties to dampen the inflationary impact from the energy shock for consumers, as they did after Russia invaded Ukraine, and these duties declined by around 8 per cent compared with the end of February. In most cases, the latest measures expired in June this year. Value added taxes are levied as a fixed percentage of the pre-tax consumer price and excise duties, currently around 19-22 per cent in most countries, and thus rise and fall with the pre-tax price but add no independent volatility. VAT accounts for roughly one-sixth of the retail price, and the VAT component increased by 24 per cent compared with the end of February, hence less than the retail price percentage change due to a cut of around 8 per cent to the average VAT rate across the euro area, from 20.7 per cent to 18.9 per cent. As excise duties and VAT together make up a big, largely fixed share of the price, a given percentage increase in crude oil prices translates into a much smaller percentage move at the station. The renewed escalation of the conflict since early July has pushed pump prices back up, to around €1.98 per litre of diesel in the third week of July, with refining margins again playing an important role. This time, refining margins made a difference, as these margins may vary for a number of reasons, including the varying refining processes according to the refined product requirements and the type of crude oil used, and the varying supply 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 of around 4.5 million barrels per day in the second quarter of 2026. This sharp supply crunch resulted 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 conflict has led to another surge in refining costs and margins to near-record highs amid reduced refining capacity, contributing €0.35 to the diesel price and €0.23 to petrol for 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 August before declining to €0.16 by the end of 2027, close to levels observed at the end of February 2026. Crude oil prices fell significantly during the recent short-lived reopening of the Strait of Hormuz from June 18, 2026, to July 11, 2026, and retail diesel prices followed suit. Over the last few decades the “rockets and feathers” literature has discussed whether there is any evidence of asymmetry, whether retail prices fall less quickly when oil prices come down compared with how fast they rise when oil prices go up. Earlier studies for the euro area failed to find any asymmetries or the overall picture was inconclusive, but more recent work suggests that the pass-through could be slower on the way down. This could reflect lags in inventory replacement, uncertainty about the persistence of crude oil price changes or weaker competitive pressure when costs decline. Further analysis is therefore needed to establish whether and why asymmetries were observed during the recent shock. The Middle East oil price shock has been significant and had a marked impact on retail fuel prices, with refining margins amplifying the effect. Overall, the Harmonised Index of Consumer Prices for fuel drove the increase in the HICP for energy from -3.1 per cent to 10.8 per cent between February and May 2026 before it declined 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, while temporary reductions in excise duties and taxes helped 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 conflict has led to another sharp rise in fuel prices reflecting not only higher crude oil prices but also surging refining margins.