The cease-fire announced Tuesday night by President Trump has been greeted enthusiastically by oil traders, who quickly pushed crude futures contract prices below $100 a barrel. But don’t expect gasoline prices to fall sharply because the bombing might have stopped. Oil actually available today overseas can cost nearly $150 a barrel.
Iran insists that, for now, tankers transiting the Strait of Hormuz must continue to seek its approval. More important for prices, Iran’s leaders have made it clear that shipping traffic is likely to remain well below prewar levels.
This will extend the disruption that sent gasoline prices above $4 a gallon nationally in March. If prices remain at this level, American families will pay on average more than $1,000 more annually for gasoline according to my calculations, a significant extra expense for families already struggling with affordability — and a potentially influential factor in the fall’s midterm elections. A 21.2 percent increase in gas prices in March helped push the annual inflation rate to 3.3 percent, according to the Bureau of Labor Statistics.
The overall impact of the current price shock, and its aftermath, on the U.S. economy will not be as bad as the disruptions of the 1970s and 1980s, because the United States has become such a large oil producer. Our economy has also become much more efficient in using energy over the decades. But that is not much consolation for consumers who are shelling out more of their disposable dollars to drive to work or to shop.
The oil market still faces geopolitical, logistical and economic speed bumps. Before the war, some 20 million barrels of crude oil and refined products flowed through the Strait of Hormuz each day. That’s about 20 percent of the global supply, making this by far the largest supply break in the history of the world oil market, dwarfing the OPEC Oil Embargo, the Suez crisis and the previous Persian Gulf wars.
That lost inventory can’t be easily replaced anytime soon. There’s still a war on, too: Ukrainian attacks may further limit Russian oil exports — and keep pressure on prices.
Even in a best-case scenario, the six-week supply bottleneck since the Iran war began on Feb. 28 — and the lengthy shipping voyages involved — means that we will face an extended period of adjustment before prices normalize. Keep in mind, too, that “normal” has been redefined. We now inhabit a world that seems a lot more perilous than the one that existed on Feb. 27.
These lingering threats to the oil trade mean that a risk premium is likely to persist. Owners of oil tankers will be paying a lot more in insurance. To the extent that oil and natural gas facilities in the region were damaged in the war — including Iranian attacks on facilities in Saudi Arabia, Kuwait and elsewhere after the cease-fire was announced — supplies could remain below prewar levels until repairs are completed.
That too, keeps upward pressure on prices. And obviously, any relapse in fighting or further interruption of flows through the strait will quickly put us back to where we were.
Mr. Trump has rightly noted that the United States is the world’s largest oil producer and that we export more than we import. That didn’t stop fuel prices from surging because oil is a global marketplace and prices reflect the bigger picture. Iran’s closure of the strait affected Asian countries most quickly, because that’s where most Persian Gulf supplies are destined. But as those countries have desperately sought other supplies, that disruption — and the higher prices that come with it — arrived at our shores.
As much as the price of gasoline has risen, prices of diesel and jet fuel have risen even faster, with diesel nearing $5.70 a gallon. About a quarter of the Gulf’s oil exports are refined products such as diesel, so losing that supply has boosted prices for many refined products well beyond the increase in crude.
Those extra costs are showing up in everything that gets moved around the country, which is why the U.S. Postal Service, Amazon, FedEx and UPS have said that they are tacking on fuel surcharges. Companies that use oil in the manufacturing process are also paying up. So, too, are farmers who buy diesel fuel and imported fertilizers that are derived using natural gas.
Surprisingly, American oil producers don’t seem to be scrambling to ramp up supply to help offset the Middle East outages. A recent survey by the Federal Reserve Bank of Dallas shows that fewer than a quarter of the companies operating in its district plan to significantly increase drilling this year. (Those looking to ramp up drilling are predominantly smaller companies, though.) Perhaps the oil producers in the Permian Basin in the American Southwest will enjoy a profit lift until there is more clarity about the oil producers in the Middle East and the durability of higher prices.
Trying to explain why oil prices have or have not moved in line with expectations is always a fool’s errand. The market is inscrutable — and a terrible predictor of price moves. One thing we do know, though, is that we can’t separate ourselves from the global marketplace. For American families and businesses, it means that if something goes wrong, anywhere, oil prices go up everywhere.
Mr. Finley is a fellow in energy and global oil at Rice University’s Baker Institute. Previously, he was a senior U.S. economist at BP and an analyst at the C.I.A.
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