Gasoline prices soar as Strait of Hormuz closes due to Iran war
Gas prices are rising as Iran closes the Strait of Hormuz, threatening oil supplies and raising concerns about the impact on the global economy.
U.S. stocks closed sharply lower on March 20, posting losses for the fourth consecutive week, pushing the tech-heavy Nasdaq and blue-chip Dow to near correction levels, or at least 10% below their recent highs.
Stocks have been reeling as the Strait of Hormuz remains effectively closed during the war with Iran. One-fifth of the world’s oil is transported through the narrow waterway, mainly to Asia and Europe, and its blockage has significantly increased the international price of Brent crude. Brent crude oil recently rose 2.84% to $111.74 per barrel.
Because oil is used in nearly every part of our lives, from manufacturing and travel to trucking produce to grocery stores to consumers ordering online to their homes and offices, economists are concerned about how high oil prices will affect inflation and economic growth. According to the Energy Information Administration, oil prices are the main driver of retail gasoline prices, typically accounting for more than half of the total price per gallon.
Economists predicted that the longer the fighting in the Middle East continues, the worse the economy will be. At the moment, there is no easy way out.
The Pentagon is sending thousands of additional Marines to the Middle East, and Reuters reported that Iraq has declared force majeure on all oil fields operated by foreign companies.
“We had expected higher spending due to tax refund season, but sustained gas price increases should more than offset that increase,” Michael Pearce, chief U.S. economist, and Bernard Yaros, lead economist at Oxford Economics, said in a note. They now expect consumption growth to slow to just 1.9% this year from 2.5% in February, the slowest pace since 2013 excluding the pandemic.
The S&P 500 composite index fell 1.51%, or 99.9 points, to close at 6,506.59. The Dow fell 0.97%, or 446.51 points, to 45,574.92. The Nasdaq fell 2.01%, or 443.08 points, to 21,647.611.
How worried should we be about oil prices?
So far, investors and economists are hopeful that the soaring oil prices will not continue. Analysts continue to point to oil futures contracts as a proxy for price expectations. They noted that crude oil delivery prices in recent months were much higher than in upcoming months.
“This divergence suggests that despite the severity of the short-term shock, market participants continue to expect a relatively quick resolution rather than a prolonged supply loss,” Fei Xu, portfolio manager of Vanguard’s Commodity Strategies Fund, said in a research note.
So why are stock prices still falling?
Some analysts said the uncertainty is having a negative impact on the stock market. Even if oil prices don’t continue to rise, no one knows how severe the ripple effects will be, especially from the Federal Reserve’s interest rate cuts, they said.
“When you have no idea what the rate cut environment is going to be, what the inflation environment is going to be, or even what the stock market environment is going to be, more people are going to be reluctant to put their money to work,” said Karen Rogers, portfolio manager at Wedbush Fund Advisors.
“I think at the end of the day, it’s all about the uncertainty of how long this is going to last and what that means for future inflation and any ramifications of future Fed rate cuts,” he added.
The Federal Reserve kept interest rates unchanged at its policy meeting earlier in the week.
“The impact of developments in the Middle East on the U.S. economy is unclear,” the Fed said in a statement explaining the decision, adding that while economic activity is expanding at a “solid pace,” job growth remains low and inflation remains modestly elevated.
Fed Chairman Jerome Powell said in a post-meeting press conference that given the recent inflation shock and weak job market, the Fed is in a “difficult situation” to balance its dual mandate of price stability and maximum employment. However, he added that concerns about “stagflation” were premature.
(Updated with new information.)
Medora Lee is USA TODAY’s money, markets and personal finance reporter. Please contact us at mjlee@usatoday.com. Subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday.
