President Donald Trump made an ALL-CAPS reversal on Iran strikes Monday morning. That sent oil prices plunging.
Sadly, your gas prices aren’t about to follow suit.
The average price of US gas is closing in on $4 a gallon, and Americans are praying for relief at the pump. Diesel has topped $5 a gallon, starting to raise prices for anything that’s shipped.
But a lot needs to happen for gas prices to sink back to the sub-$3 range from before the war: Iran needs to open the Strait of Hormuz. Oil production needs to come fully back online. And lower crude prices need to make their way through the system.
None of that is guaranteed. Even if it were, it’s not a fast process.
Iran has to play ball
Trump on Monday told CNN’s Kaitlan Collins that the Strait of Hormuz will open soon to oil tanker traffic, provided negotiations bear fruit. He said he hopes the crucial waterway would be jointly controlled by the United States and Iran.
“Me and the Ayatollah,” Trump said.
That’s a crucial admission and the crux of the problem: The United States doesn’t currently control the strait — Iran does. Closing off the strait caused instantaneous economic damage to much of the world, giving Iran significant leverage in the war.
“It takes two to TACO,” said Helima Croft, head of global commodity strategy at RBC Capital Markets, referring to the Wall Street acronym: “Trump Always Chickens Out.”
“I don’t buy that it is the beginning of the end,” she said.
Iran’s effective closure of the Strait of Hormuz is similar to China’s decision to close off rare-earth licenses to US businesses in response to Trump’s historic trade war. As with Iran, the Trump administration failed to anticipate China’s willingness to take a self-inflicted economic wound in exchange for gaining the upper hand in negotiations with the United States.
But China, at least, has stable leadership. Israeli and American bombardment of Iran has killed many representatives of Iran’s government. Trump didn’t even name who the United States is negotiating with, saying only his administration is in talks with “a top person” and reached agreements on “major points.”
Energy Secretary Chris Wright acknowledged to CNBC on Monday that it wasn’t clear who the United States should negotiate with.
“There’s been a lot of turnover in (Iran’s) energy leadership,” Wright said. “That’s one of the things we’ll learn here in these dialogues: Who is in power?”
That raises questions about whether Iran’s negotiators speak for the whole of government, and if they have the authority and power to reopen the Strait of Hormuz – if they exist at all. Iran’s Foreign Ministry spokesperson Esmaeil Baghaei has denied that Iran held negotiations with the United States.
Oil doesn’t work like a light switch
Assuming the negotiations are a success, and Iran agrees to fully reopen the Strait of Hormuz, oil prices would probably fall sharply and quickly. Just Trump’s mention of the possibility sent oil sinking about 7% Monday.
But significant damage has been done to the surrounding infrastructure, including to gasoline refineries. Qatar said Iran’s bombardment last week of its Ras Laffan liquefied natural gas port — the world’s largest — was so extensive that it would take years to fully come back online.
Many energy production facilities were left undamaged but were turned off during the conflict, because the closed Strait of Hormuz left no way for producers to ship their oil. Production of operational facilities could take weeks to come back online.
“Turning on and off the oil spigot is not the same as switching on and off your lights,” noted Joe Brusuelas, chief economist at RSM US. “It’s a minor engineering feat.”
That’s why it will probably be three to four months after hostilities end in the Middle East before oil and gas production approaches anything close to pre-war production levels.
Rockets and feathers
That’s not all: Insurance companies will need to be satisfied that oil tankers they cover will be able to safely navigate the Strait of Hormuz — which Iran has mined — without fear of attack. Gas refineries will need to produce gasoline at the lower crude prices, which then need to be piped to wholesalers and shipped to gas stations.
And gas stations, which operate on razor-thin profit margins, will need to be willing to lower prices. No gas station owner in town wants to be the first mover.
That’s why the industry describes gas-price changes as “rockets and feathers.” Gas prices tend to shoot higher like a rocket when oil prices rise but come down slowly like a feather when oil falls.
That phenomenon has frustrated politicians for ages, including former President Joe Biden, who in 2022 griped that gas prices hovered around $4.30 a gallon even when oil prices fell more than $20 to below $100 in a matter of a couple weeks.
High gas prices inflict more damage than presidential approval ratings — although they certainly do that. They also immediately add significant cost to American households. Every extra dollar gas prices rise translates to $122 billion in additional annual spending at the pump in the United States, according to Mark Finley, a nonresident fellow in energy and global oil at Rice University’s Baker Institute and a former senior economist at BP.
That’s about $1,000 per household per year.
“It’s the only price that screams at you from every street corner,” Finley said. “The price of gasoline matters in many different ways — most importantly for consumers’ pocketbooks.”
