Oil prices are approaching $US100 a barrel as hostilities in the Middle East have flared again, threatening a new burst of global energy-related inflation and economic pain.
Despite the aggressive (and horrendously expensive) US naval and military presence in and around the Persian Gulf, oil cargoes transiting the Strait of Hormuz are still at only about a third of their pre-war levels of 20 million barrels a day.
The naval blockade and America’s tightening of sanctions on Iran may be strangling Iran’s economy, but they haven’t been able to ensure safe passage for the large tankers that would allow for a return to pre-war oil flows from the Middle East.
While Donald Trump keeps asserting that the war (which he has claimed to have won at least half a dozen times) is nearing its end, Iran – which says it is close to concluding an agreement with Oman over the management of the strait once the war does end – shows no signs of surrendering.
The Islamic republic is still firing missiles at US ships and tankers even as the US is attacking Iranian tankers and effectively shutting down Iran’s oil exports.
Iran’s allies, the Houthis, are attacking Saudi Arabia’s oil refineries and threatening the pipelines that carry about 5 million barrels of all a day to a terminal on the Red Sea’s coast, which has enabled the Saudis to circumvent the strait for at least some of their oil shipments.
After a relatively quiet August, which saw the oil price drop from above $US100 a barrel in late July to below $US90 a barrel, prices are moving up again and prolonging the impact the war is having on the global energy markets and economy.
For much of the period after the US and Israel attacked Iran in February, the full impact of the closure of the strait and the Iranian attacks on the region’s oil infrastructure has been blunted.
Before the attacks, oil supply was out-stripping demand by about 2 million barrels a day, so there was a lot of oil and oil-derived products either being stockpiled or already on the water before the war started.
Those global inventories have been run down – the International Energy Agency says by more than 400 million barrels – by the biggest release of national strategic reserves in history, and as commercial stocks have been depleted.
The world is paying, and will continue to pay, a price for the Trump administration’s arrogance and ineptitude.
While production increases from outside the Persian Gulf – in the US, Venezuela, Guyana and Russia – have helped blunt the impact of the reduced flows from the Middle East, the biggest dampening impact on prices was the withdrawal of China, the world’s biggest oil importer, from the market. It was able to draw on a pre-war strategic reserve of well over a billion barrels.
After its imports fell to levels not seen in a decade in June, China resumed imports modestly in July and more meaningfully in August, where they averaged about 9 million barrels a day.
While the spike in oil prices, which were at around $US70 a barrel before the war, has reduced demand (some of it, perhaps, permanently), the IEA’s most recent supply-demand projections, released last month, show the energy agency expects demand to be about 1.6 million barrels a day lower this year than last while supply is expected to fall by about 4.3 million barrels a day on average.
The rundown in reserves has, so far, filled that gap in supply. But the longer the war is prolonged, the more the underlying demand-supply imbalance will show through and impact prices.
While the world tends to focus on the price of crude oil, that’s not what it consumes.
The damage to Middle Eastern oil infrastructure, particularly the refineries and the global run-down in commercial stocks, has resulted in the prices of refined products soaring.
It hasn’t helped that increasingly successful Ukrainian attacks on Russian refineries have transformed Russia from a major exporter of refined products, like diesel, into an importer.
Jet fuel prices, for instance, have rocketed. According to the International Air Transport Association, last week’s prices were on average 90 per cent higher than for the same week last year.
Diesel prices have also soared. While prices vary widely around the globe, the US price for diesel has surpassed its recent peak in 2022, after Russia invaded Ukraine, and at $US5.90 a gallon is now at record levels. A year ago, the average US price was $US3.70 a gallon.
US gasoline prices have also leapt, from an average of $US3.20 a gallon a year ago to $US4.15 a gallon.
A Brown University study has estimated that the war’s impact on gasoline and diesel prices has cost US consumers more than $US100 billion so far and is rising by $US1 million every two minutes, which provides an indication of how material the conflict’s consequences have been for the global economy – and will continue to be until it ends.
Some are optimistic, including Trump.
“Oil prices will drop precipitously, like everything else is dropping (but more!), when we WIN the war with Iran. Three Dollars a gallon, but ultimately, below Two Dollars a gallon. It will all happen quickly, and Iran will never have a Nuclear Weapon. MAGA!” he posted this week.
Apart from the reality that US prices have not been dropping, and that the war he has claimed to have won many times before has yet to be won and may never be – “winning” will be defined by the status of the strait, on which Iran has vowed to impose a level of control that hadn’t existed before the war – it would take a very severe US recession for gasoline prices to fall below $US2 a gallon.
Trump, with his trade and real wars and his spendthrift approach to government spending could, of course, inadvertently generate one.
The US Treasury Secretary Scott Bessent said last week oil prices could fall below $US40 a barrel once the conflict ended, arguing the market would be over-supplied. He’s as deluded as his master – unless they orchestrate a global recession.
Prices would fall if the conflict ended and the strait fully reopened, without any material Iranian and Omani tolls. Supply would most likely recover more quickly than demand, but not by the sort of magnitude that would drive prices down to Bessent’s predicted levels.
Product prices will take longer, given that it will take time to repair damaged infrastructure and replenish stocks to more normal levels.
In the meantime, the higher oil, refined product and fertiliser prices (the Middle East is a major producer) continue to feed into businesses and their logistics costs and end prices to consumers, fuelling and entrenching inflation and lowering economic activity while generating pressure for higher interest rates.
The world is paying, and will continue to pay, a price for the Trump administration’s arrogance and ineptitude. But the US isn’t immune from the fallout. Its consumers are also hurting and the administration may/should pay a price for its misjudgments at this year’s midterm elections.
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