EconoScope | Middle East conflict drives up costs, dents demand at U.S. fast food chains

(ECNS) -- More than a month after U.S. and Israeli strikes on Iran, the economic fallout is reaching American fast-food chains, where rising energy and commodity costs are squeezing margins and weakening consumer demand.

A latest report by U.S. investment research firm Bernstein says fast-food giants such as McDonald's and Restaurant Brands International (parent company of Burger King and Popeyes) are facing rising costs and weakening demand.

Energy shock ripples through supply chains

Following the outbreak of conflict in the Middle East, traffic through the Strait of Hormuz dropped sharply, prompting the International Energy Agency to launch its largest-ever coordinated release of oil reserves—about 400 million barrels, according to data released on March 11. Global oil prices briefly surged to nearly $120 per barrel.

Higher energy prices are pushing up key costs across the fast food supply chain.

Transport costs have risen as fuel prices climb and shipping routes lengthen, with surcharges passed along to businesses. Cold-chain logistics, essential for storing and transporting food, are also becoming more expensive due to higher energy consumption.

According to Carl Skau, deputy executive director of the UN World Food Programme, soaring fuel prices and longer supply chain routes have pushed shipping transportation costs up by 18%. So, increased fuel costs are typically passed down the supply chain through surcharges.

Cold-chain logistics, essential for restaurant operations, also consume large amounts of fuel for electricity, further raising operating costs.

Packaging costs are also under pressure. Many materials used in fast food packaging are derived from petrochemicals, linking their prices closely to energy markets.

Data from Ralph Lowe Energy Institute shows Gulf Cooperation Council countries produce about 150 million metric tons of petrochemicals annually, accounting for roughly 12% of global output, most of which is exported via the Strait of Hormuz.

Supply chain analytics firm Altana estimates that petrochemical materials worth about $733 billion flow through the Gulf region annually, representing 22% of global supply, and any disruption could affect downstream goods worth up to $3.8 trillion, including the food industry.

Fertilizer prices, a key input for agricultural production, have also increased amid supply disruptions.

According to data released by UN Trade and Development (UNCTAD) on March 10, about one-third of global seaborne trade in fertilizers passes through the Strait of Hormuz, which has been nearly entirely closed since the U.S. and Israel attacked Iran on Feb. 28.

Data from S&P Global Platts shows granular urea prices have surged 38.8% during the critical spring application season — from below $500/mt in late February to $680/mt by March 13. Ammonia logistics have also been strained, as vessel delays and halted traffic near the Strait of Hormuz impact roughly 24% of seaborne ammonia exports, pushing prices up by 11.6%.

Higher farming costs are expected to translate into more expensive crops such as wheat and corn, adding further pressure on food prices in the coming months.

These increases will eventually flow through the supply chain, putting pressure on companies like McDonald's.

Consumers pull back

On the demand side, rising fuel costs are weighing on consumer spending, particularly among lower-income households that make up a large share of fast food customers.

As energy costs rise, discretionary spending on dining out is often among the first to be cut. This trend is already affecting major chains, with weaker foot traffic reported in some markets.

While McDonald's has implemented extensive hedging strategies for energy and commodities to shield franchisees from short-term price volatility, Bernstein warns that if energy prices remain elevated into the second half of 2026, these hedges will eventually expire at higher market rates, shifting the burden back onto consumers.

Caught between rising costs and weakening demand, fast food chains face growing pressure on both margins and sales, with limited room to absorb further shocks if global energy markets remain volatile.

(By Gong Weiwei)