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The Strait of Hormuz is no longer paralyzed and yet fuel prices remain painfully high. This is a thorny problem with profound financial, political and economic consequences.
Gas prices, which average $4.36 per gallon nationally, have never been higher this time of year, according to AAA data.
Even after a series of emergency measures from U.S. and European states, diesel is only about 20 cents off the record high reached last month.
In short, what began as an oil supply crisis caused by the war in Iran has morphed into a broader energy crisis felt by drivers, truckers and farmers around the world.
Unblocking the Strait of Hormuz has been helpful, but it remains incredibly dangerous – and therefore costly. Additionally, Russian refineries are being destroyed by Ukrainian drones and Houthi attacks in the Red Sea have disrupted a vital shipping route.
“The wars have not been resolved. There is no peace. The energy system is still restricted,” said Jan Stuart, global energy strategist at Piper Sandler.
Security challenges have been underscored by the exorbitant cost of removing crude oil from the Middle East.
Last year, the daily cost of chartering a supertanker (known as a Very Large Crude Carrier, or VLCC) to sail from the Persian Gulf to China was just $65,000, according to Clarksons, a London-based research firm.
By the time the war in Iran was about to begin, that cost had risen to $230,000 per day.
NOW? It costs $1.6 million per day to rent a VLCC for this route, according to Clarksons.
“It’s insane,” said Tom Kloza, chief energy adviser at Gulf Oil. “If you own an oil tanker, you’re in great shape – as long as it’s not affected by war.”
But some tankers do not escape unscathed.
Several commercial vessels have reported being hit by projectiles in the Strait of Hormuz in the past few days alone, including at least two oil tankers, according to UK Maritime Commercial Operations.
But it’s not just about the cost of renting a tanker.
This is the price of persuading sailors to undertake dangerous voyages into war zones.
Some shippers are offering sailors up to $25,000 per trip — an amount that could amount to more than a year’s salary, according to the Wall Street Journal.
Insurance costs have also soared, reflecting the risk of crossing the region with valuable goods.
Oil producers now pay between $30 million and $40 million for a round trip across the Strait of Hormuz, the Journal reported.
All of this – the cost of renting an oil tanker, exorbitant payments to mariners and rising insurance rates – is making shipping more expensive for consumers and businesses around the world.
Previously, it cost just $2 a barrel to extract crude from the Persian Gulf. Today, that cost has risen to about $33, according to Kloza.
“We’re extracting a reasonable amount of crude, but that’s misleading because the cost of getting that crude out is unbelievable,” he said.
This helps explain the significant gap between the price of crude in financial markets and the price in the real world.
Consider that the price of Dated Brent – the actual cost of immediately physically receiving barrels of crude – was $135.74 per barrel on Thursday, according to S&P Global Platts. That’s well above the Brent futures price of around $100 and not far from the all-time high set in April.
And it is this real price that is reflected in what consumers pay at the gas station.
“The United States does not live in isolation. We live with a global price because we import gasoline,” Stuart said.
The global energy system is not experiencing just one war, but two or even three wars – simultaneously.
In addition to the U.S.-Iran war, a conflict that has lasted far longer than many initially imagined, there is the battle between Yemen and Iran-backed Houthi rebels.
Houthi drone and missile attacks have disrupted another vital chokepoint for global trade, the Bab al-Mandeb Strait.
And then there are the increasingly successful Ukrainian drone attacks that are destroying refineries in Russia, one of the world’s leading diesel exporters.
Faced with fuel shortages at home, Russia responded by limiting its fuel exports. China, seeking to avoid shortages itself, has also restricted exports.
American refineries are the only ones still standing. But they already produce as much gasoline, diesel and jet fuel as possible. Now, some U.S. refineries are reducing production for routine maintenance that typically takes place at this time of year.
Hurricane Isaias could make the situation worse if it disrupts production or damages refineries along the U.S. Gulf Coast.
Energy prices would be much higher without the fact that the world had a large rainy day fund built up at the beginning of the year.
Commercial and emergency stocks serve as shock absorbers in the event of a crisis.
But today, those stocks have been aggressively reduced, now leaving the world with less room for error. This reduction in inventory has increased the premium embedded in current prices.
“We’re operating on very, very low inventory. We don’t have any reserves left,” Stuart said.
All of this explains why prices remain high and risks high – even as the flow of oil out of the Strait of Hormuz has returned to pre-war levels.
“All three wars need to be ended – or even two out of three wouldn’t be bad,” Kloza said.
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