Fuel prices across the United States have climbed significantly during the intermittent conflict with Iran. After a brief period of calm, the average cost for gas has seen a rapid increase of 15 cents in a single week, now standing at $3.94 per gallon. It appears to be heading back above the $4 mark.
Diesel, which directly impacts customers’ shipping costs, also exceeded $5 a gallon again on Thursday, marking its first return to that level in three weeks, according to figures from AAA. This serves as a stark reminder of how military conflicts in the Persian Gulf can have a direct effect on personal finances.
Rising Fuel Costs Return
The situation, however, is not entirely straightforward. Rising fuel prices are no longer solely a story about higher oil prices; gas and diesel costs have developed their own trajectory. This trend appears somewhat disconnected from events in the Strait of Hormuz and America’s diplomatic efforts to secure concessions from Iran.
During a three-week period when the Strait of Hormuz was at least partially operational, oil companies successfully moved over 200 million barrels of crude out of the Persian Gulf. This briefly pushed oil prices below their pre-war levels. Gas and diesel prices also saw a decline, though they remained nowhere near their pre-war standing.
Oil Market Gains Outpaced by Fuel Prices
Following the collapse of the Memorandum of Understanding between Iran and the United States last week, oil prices experienced a sharp increase. They rose above $85 a barrel, having previously hovered in the low $70 range for several weeks. This upward movement in oil prices significantly influences gas prices, as crude constitutes the vast majority of gasoline’s overall cost.
Yet, since the start of the war, oil prices have increased by 16%, while both gas and diesel have risen by more than 32%. This represents double the gains observed in the oil market itself.
Global Refining Capacity Under Strain
This substantial imbalance can be attributed in part to market and trading dynamics, but also significantly to the specific intricacies of oil refining. Regardless of the volume of oil that exited the strait during those brief moments of relative peace, that crude required processing to become usable fuel.
Refineries, which had already finalised their plans for July when the MOU was signed, cannot simply adjust their capacity up or down with immediate effect. The world’s overall refinery capacity experienced a considerable reduction during the conflict; Iran damaged or destroyed 30 refineries across the Middle East. This damage hindered any significant recovery after the MOU came into force.
At the peak of the Strait of Hormuz disruption, global refinery output declined by 3 million barrels. Currently, 2.1 million barrels of refining capacity remain offline, as reported by Natasha Kaneva, chief commodities economist at JPMorgan.
Regional Impacts and the Diesel Shortage
In a completely different part of the world, refinery capacity has also suffered a dramatic impact. Ukraine’s drone strikes have damaged so many Russian refineries that Russia, previously the world’s second-largest exporter of diesel, has ceased exporting fuel. It has, in fact, abruptly become a net importer, contributing to a global diesel shortage.
The United States, by contrast, faces the opposite challenge. Its refineries were operating at 96% of capacity last month, processing their largest amount of crude in the second quarter since 2019. However, a record volume of American-produced fuel is currently being sent overseas, including jet fuel destined for Europe.
Ultimately, the current landscape illustrates that rising fuel prices involve more than just an increase in oil prices alone.