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The cost of filling up at the gas station is mounting rapidly as the ongoing conflict in the Middle East shuts down much of the region’s huge volume of oil and gas exports. The national average price of regular unleaded has risen to $3.60 per gallon. On the eve of the U.S. and Israeli air strikes, the average price was $2.98. Barring a sudden cease-fire, retail fuel prices will keep climbing, with $4 a real possibility. Diesel fuel is rising even faster than gas, with the national average price of diesel now at $4.86 per gallon. A week ago, it was $4.17. Diesel is sure to exceed $5 on average, and may challenge its all-time high of $5.82, set in June 2022 when Russia’s invasion of Ukraine roiled petroleum markets.
Crude oil prices have risen from about $65 per barrel for benchmark West Texas Intermediate crude, right before Operation Epic Fury commenced, to $95 per barrel now. Why? Iran has responded to the U.S. and Israeli airstrikes by effectively closing the Strait of Hormuz, the narrow waterway connecting the Persian Gulf with the Indian Ocean and global markets. Normally, a fifth of global oil supplies passes through the strait. Now, almost none is getting through, especially after several tankers and other vessels were attacked by drones. Pipelines in the region can carry only about half of the Persian Gulf’s oil to ports elsewhere, meaning the other half is basically stranded. And there is no way to make up for so much lost supply anywhere else in the world. Even the coordinated release of oil from emergency stockpiles, announced by the International Energy Agency earlier this week, has done little to assuage the market’s fears of shortages.
We look for WTI crude to trade above $80 per barrel while the conflict lasts, and possibly exceed $100 soon. Even a quick resolution of the war wouldn’t end fears of supply shortfalls, since restarting idled oil wells and resuming normal tanker traffic in the Persian Gulf will take weeks. Some of the Middle East’s energy infrastructure has been hit by missiles and drones. Wells that were shut down for lack of tanks to store the stranded oil may not come back online quickly. And mines that Iran has reportedly deployed in the Persian Gulf would remain a hazard to shipping until they can be cleared. In other words, oil prices appear likely to remain high for an extended period of time. Just how high is the largest unknown. Some market analysts have warned of prices hitting $150 per barrel, which could do serious damage to the global economy if sustained for a while.
Natural gas prices in the United States are remaining under control, fortunately for consumers. Benchmark gas futures contracts were recently trading at $3.19 per million British thermal units, little changed from where they were before the war started. Unlike Europe and Asia, which are heavily dependent on imported gas from the Middle East, America is the world’s biggest gas producer and exporter. So we should remain relatively insulated from the volatility and price spikes afflicting other major gas markets. That’s a relief, since natural gas is the top fuel for generating electricity in the United States, as well as the most widely used fuel for home heating. Odds are, natural gas prices will remain fairly low in this country until summer, when heat waves can boost electricity demand and lead to heavy gas consumption at power plants.
