Iranians react to US-Israel ceasefire in war against Iran
Crowds gathered in Tehran as Iranians reacted to a two-week cease-fire in the US and Israel’s war against Iran.
In his April 1 address to the nation, President Donald Trump talked about the Iran war and the battle for control of the Strait of Hormuz as if the outcome would have little impact on U.S. oil and gasoline markets.
“The United States imports almost no oil through the Strait of Hormuz, and will never import any oil,” Trump said. “We don’t need it. We didn’t need it, and we don’t need it either.”
It is true that the United States is less dependent on foreign oil than in the past. And only 8% of the oil we import comes from the Middle East.
So why have gasoline prices skyrocketed in the United States?
The average price of a gallon of regular gasoline in the U.S. as of April 8 was $4.16, up from $3.45 a month earlier and less than $3 at the beginning of the year, according to AAA.
Oil prices plunged on the same day following news of a fragile ceasefire agreement. Gas prices may follow suit. But don’t expect gas to go back to $3 anytime soon.
“If the conflict stops and there is some kind of meaningful end, we expect oil prices to fall relatively quickly,” Prestige Economics president Jason Schenker said just before the ceasefire. “I don’t think they’ll ever get back to where they were.”
Why did gas prices here increase due to the Iran war?
As of January, the United States was producing more than 13 million barrels of crude oil per day. We export more oil than we import. But it also consumes a lot of oil, importing about 6 million barrels per day. Only a small portion comes from the Persian Gulf.
Based on these facts, you might think that a war in the Middle East would not affect U.S. gasoline prices. That would be a mistake.
“This is a global market,” said Mark Zandi, chief economist at Moody’s Analytics. “So oil is literally flowing towards the highest price. If a tanker can get a higher price in Malaysia than in Rio de Janeiro or in Rotterdam, then that tanker is going to go to Malaysia.”
When the United States began airstrikes against Iran, oil prices skyrocketed around the world.
According to one such index, the West Texas Intermediate Index, oil prices rose from about $67 on February 27 to about $105 on March 30.
Oil prices rose as the Iran war crippled regional supplies due to, among other things, the closure of the Strait of Hormuz, the sudden danger of crude oil shipments, and collateral damage to oil industry infrastructure.
The war threatened oil supplies to heavily oil-dependent regions of the Middle East, including parts of Asia and Europe. Prices have gone up everywhere, including here.
“Everyone is competing for the same barrel of oil,” said James Cox, managing partner at Harris Financial Group. “It doesn’t matter if it’s produced in Texas, or Iran, or Saudi Arabia, or Russia.”
The United States is the largest oil producing country on earth. But we are also the biggest consumers of oil. And American oil producers are part of the world market.
“We produce as much as we consume,” Zandi said. “But at the end of the day, producers here sell to whoever can offer them the highest price. They are businessmen.”
The West Coast is particularly vulnerable to Middle East oil shocks because more of its oil comes from the region. That’s one reason California gas prices have soared to $5.93 a gallon, said Kate Gordon, CEO of sustainability nonprofit California Forward.
“You don’t get anything east of the Rocky Mountains,” she says.
This was not a repeat of the oil crisis of the 1970s
Californians and others can remember that the Iran war did not cause a gasoline shortage in the United States. Yes, there were long lines for gas, but they were mostly people looking to save a few bucks at Costco.
This is a far cry from the oil crisis of the 1970s, which led to rationing, price controls, shortages, a national 55 mph limit and long lines at gas stations across the country.
Economists say that for American consumers, the Iran war has been more of a hardship than a crisis. Motorists now pay more for the gasoline they purchase. Oil companies made more money by selling more oil.
Some other countries heavily dependent on oil from the Middle East have introduced rationing, four-day working weeks and remote working, and urged people to use less air conditioning and take more public transport.
“The U.S. economy is somewhat protected from shocks on the net, because the U.S. is a very large supplier,” said Nikolai Rusanov, a professor of finance at the Wharton School at the University of Pennsylvania. “But that doesn’t help consumers at the pump.”
How soon will gas prices fall after the ceasefire?
With the ceasefire, many observers expect gas prices to fall quickly, but not to $3 a gallon.
If there’s a ceasefire, “we’ll probably get back to $3.50 by the end of the summer, but it’ll probably stay there for a while,” Zandi said.
Cox said oil and gasoline prices will remain high for several months unless some new source of information comes online.
“Insurance premiums for ships passing through the Strait will go up,” Zandi said. “There’s always a chance that the ceasefire will be broken. Traders will want some premium to compensate for that risk,” he said.
This premium “will probably continue for a while,” Cox said. He points out that crude oil futures, which predict future prices, will remain high until the end of 2026.
The Iran war damaged or disrupted oil infrastructure in the Middle East. Some “will take years to rebuild,” Gordon said. Meanwhile, global oil supplies will remain tight.
“We can’t go back to how things were before,” Zandi said. “At least not this year.”
