Half a year after the first strikes in the war with Iran, the economic disruption for American consumers has yet to subside. While the global market for crude oil has proved surprisingly resilient to major disruptions in the Strait of Hormuz, fuel costs face increasing upward pressure as the war drags on.
Nationwide, the average price paid for regular gasoline remains above $4 per gallon, while diesel costs more than $5.60 per gallon. Since diesel is the fuel that transports goods across the country, its elevated price contributes to wider inflation.
Prior to the conflict, about 20% of the world’s crude oil supplies flowed through the Strait of Hormuz, a narrow waterway linking oil-producing nations in the Persian Gulf with the open ocean. Refined products like gas, diesel and liquefied natural gas also transit the Strait under standard conditions.
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When the war began, President Donald Trump and administration officials framed the economic pain as temporary, and worthwhile to throttle Iran’s nuclear ambitions.
Secretary of State Marco Rubio said in late March that the conflict would conclude “in a matter of weeks, not months.”
Experts on oil and fuel markets told Straight Arrow that while crude oil has managed to continue flowing, the supply chain for refined fuel products made from that oil, including gasoline, is increasingly strained. An older conflict — between Russia and Ukraine — is adding to pressure on fuel supplies. And with colder weather coming, numerous risks complicate the prospect of price relief.
“We don’t have a crude oil problem. We have a problem with where to put the crude oil,” said Skip York, nonresident fellow on global oil at Rice University’s Center for Energy Studies. “We have a global refining crisis.”
What held back oil prices?
The rise in oil prices over the past six months could have been worse, experts told Straight Arrow. But a series of adaptations dampened the blow, keeping prices lower than they otherwise may have been.
China tapped its oil stockpiles and cut how much oil it imported from the global market by at least 30%. Domestic oil consumption in China has also been declining.
China has “pushed these government policies that have made them way more energy secure than a lot of other countries,” Jim Krane, energy research fellow at Rice University’s Baker Institute for Public Policy, told Straight Arrow. “Not only did it help China, it helped the global economy.”
The U.S. and European nations tapped their petroleum reserves to increase the amount of oil in circulation. And Saudi Arabia has redirected as much oil as it can into pipelines that fill tankers in the Red Sea rather than inside the Persian Gulf.
READ MORE: What 50 years of oil shocks explain about the future of gas prices
The global price benchmark for crude oil, Brent, was trading in the upper-$60 range in February before the first strikes. It has climbed above $100 a barrel numerous times since, even briefly topping $120. But analysts noted that although elevated from pre-war levels, prices have been relatively stable over the past two months in the upper-$80 to low-$90 range.
That stability was helped along by the fact that in June, the Strait briefly opened and more oil was able to flow. Prices dropped as low as $71 per barrel before rising as the ceasefire frayed. That back-and-forth dynamic characterized the first six months of the conflict. And some oil continues to flow through the Strait, though experts aren’t sure exactly how much.
But underneath the daily price fluctuations, another problem continually ratcheted up: damaged refineries that turn crude oil into gasoline.
The refinery problem
Ukraine has conducted 18 strikes on Russian oil refineries this month, the Guardian reported.
When it comes to how much Americans spend at the gas pump, “this year, geopolitics have been the driving force,” Patrick De Haan, head of petroleum analysis at GasBuddy, told Straight Arrow. He added that the Ukrainian strikes are even “more problematic and impactful to the price of refined products like gasoline, diesel, and jet fuel” than how much oil is flowing through the Strait of Hormuz.
Slightly more than 10% of the world’s refineries are located in the Middle East, and many have been damaged during the war. As a result, the region’s output of refined products is down by 2.7 million barrels a day, according to data analytics firm Kpler.
“No country can really fence itself off or insulate itself,” De Haan said, because fuel markets are increasingly global.
Between disruptions in the Middle East and Russia, about 10% of the world’s refining capacity is offline, York told Straight Arrow. “The crisis is expanding because the market can’t figure out how to solve the product problem,” he said.
Refineries in the U.S., which are concentrated on the Gulf Coast of Texas and Louisiana, are operating near their maximum capacity, said Al Salazar, head of macro oil and gas research at the energy consulting company Enverus.
“There is no cushion,” Salazar told Straight Arrow.
U.S. stockpiles — both the strategic petroleum reserve and gasoline stocks — are low, and as summer fades, prices at the pump could grow worse.
The weather risk
The refineries switch fuel blends each fall. The temporary lapse in production could drive up prices, but Salazar is more worried about hurricane season and the possibility that storm damage affects U.S. refiners’ output. Luckily, the Atlantic hurricane season has been quiet thus far, and the National Weather Service predicts below-normal storm activity.
As weather grows even colder, the worry shifts from the cost of gasoline to heating oil and liquefied natural gas (LNG). Heating oil is a refined petroleum product directly affected by the drop in global refining capacity. Qatar is a top producer of LNG, which is derived from gas rather than oil, and its supply chain has been damaged during the war.
“I’m really worried we are going to see heating oil prices elevate dramatically, especially if it’s colder than normal,” York said. And that could hit the northeast U.S., where many homes depend on heating oil.
READ MORE: Low-income homes left in the cold as billions in heating aid frozen
For LNG, York is mainly concerned about Europe, where high prices, and even shortages, are possible depending how cold it becomes. But in New England, where pipeline connections to the rest of the U.S. are limited, the grid sometimes depends on imported LNG, exposing residents to increased prices during periods of high demand, like a winter storm.
While traffic through the Strait of Hormuz could return quickly if a lasting peace is reached, the fuel supply chain isn’t as simple.
“This thing’s going to get unwound in years. This is not a short-term phenomenon,” York said.
For now, Salazar said he expects gas prices to continue rising until demand falls. He isn’t counting on more stability until there’s enough supply to refill backup storage.
“We are still in a bit of a bind, and the backups have all been exhausted,” Salazar said.
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