This week, we take a closer look at the rapid rise in oil prices worldwide, which has numerous downstream effects on fashion brands.
The U.S.-Israel war in Iran, which began on February 28, has already had a major impact on tourism and foot traffic to the previously booming Middle Eastern luxury fashion market. But the war’s biggest impact is only just beginning to become apparent.
Oil prices spiked by 17% on Monday as the Strait of Hormuz, a strategically important waterway where a quarter of the world’s oil is shipped, became engulfed in the war. Iran has begun laying thousands of mines throughout the waterway to block shipments of oil, and the U.S. government, which previously vowed to escort ships through the Strait, has gone back on that promise.
The ways that rising oil prices will affect fashion businesses and consumers are manifold. Experts told Glossy that brands will likely see increased operational costs on international shipping and the production of plastic or plastic-derived products and components. In addition, it will put a damper on consumer spending as shoppers devote more of their paychecks to covering their energy needs.
“The thing about gasoline prices is that they’re multiplicative,” said John Mercer, head of global research and managing director of data-driven research at the consumer insights company Coresight Research. “Rising oil prices are going to be felt everywhere. We’re in our sixth consecutive year of inflation, which is already not a good place to be. The chances of inflation going down this year now are very low.”
Mercer said the consumer segment most likely to be immediately and heavily impacted will be, unsurprisingly, lower-income households. Those consumers already have their wallets stretched thin, but gasoline prices, which have risen by 23% since the war began, will eat up more of their discretionary spending.
That, in turn, means that fashion brands will likely need to lean even more on their higher-end customers, a trend that has been ongoing for years. But even high-income customers won’t be unaffected. Shocks to the stock market, where many high-net-worth consumers have their wealth tied up, may also impact their spending on fashion goods. An analysis by the investment advisory company Vanguard found that the stocks most likely to be affected are in Europe, with prolonged increases in oil prices taking a full percentage point off European stocks and likely causing a recession.
Rising oil prices can have an impact on fashion brands that incorporate oil-based materials, like plastic, acrylic or polyester, into their products.
“Crude oil is one of the main raw materials needed to create conventional plastic, subjecting manufacturers from electronics to retail to construction and beyond to volatile oil markets and pricing,” said Albert Douer. Douer is the CEO of UBQ Materials, a global manufacturing company which works with major brands like Mercedes-Benz and fashion companies like Mainetti. “Safeguarding business resilience amid ongoing conflict will be crucial for global economic stability.”
The biggest impact will be on brands’ shipping costs, which are heavily dependent on fuel prices and the security of international waters.
“Even a moderate increase in oil prices can ripple through supply chains because nearly every product sold globally has transportation embedded in its cost,” said supply chain expert Isaac Hetzroni. “For brands that manufacture internationally, rising freight and logistics costs can squeeze margins or push brands to slightly adjust pricing. But most luxury brands typically just eat any increase in costs as their margins can support it.”
While freight and shipping prices can go up quickly, it will take much longer for them to come down, if they ever do. The International Energy Agency, a group made up of dozens of allied countries like the U.S., Mexico, Italy and Germany, agreed to release 400 million barrels of reserve oil to help combat rising prices on Wednesday. While oil prices did briefly come down after the announcement, they continued climbing overall and remain high.
“Even a short disruption can see price spikes that last weeks to months as the freight market takes time to recover,” said Amrita Bhasin, co-founder and CEO of the inventory management company Sotira.
While there is little that fashion brands can do to de-escalate a geopolitical conflict, there are ways they could have, and still can, mitigate the effects.
“The prescription for all unpredictability is the same,” Mercer said. “If you’re diversified in your supply chain, you stand a better chance of getting around this. Luckily, Covid and then tariffs prepared a lot of people, and many businesses are more diversified now than they were a few years ago.”
Still, Mercer said brands should expect more ups and downs in the months to come.
“At the retail level, uncertainty is the new certainty,” Mercer said. “From Covid to tariffs and now the war, companies are getting used to the unpredictability.”
Other oil-based developments
- The E.U. is reportedly considering subsidizing oil prices in the short term to deliver immediate relief to the European market.
- Some analysts initially predicted the average American’s cost of living would rise by around 1.2% this year. Now, with rising oil prices, revised predictions put it nearly three times higher, at 2.8%.
- On Tuesday, the U.S. government said it had attacked 16 Iranian vessels laying mines in the Strait of Hormuz. Despite this, the waterway remains effectively closed as of Wednesday afternoon.
- Without the ability to ship oil through the strait, many other oil-producing countries like Iraq and the United Arab Emirates have temporarily halted production since they are running out of storage for the unshipped barrels.
Other news to know
- Amazon won a court order that blocked Perplexity’s AI shopping agents from accessing Amazon data. Specifically, Amazon objected to Perplexity accessing password-protected parts of Amazon’s website.
- Despite challenges from the war in Iran, Zara-owner Inditex reported a 9% increase in sales over the last month compared to the year before.
- Quince raised $500 million in new funding this week, bringing its current valuation to over $10 billion.
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