Gas Prices Could Go Back To $5

Almost exactly four years ago, Russia started its invasion of Ukraine. Fairly quickly, the US sanctioned Russia’s oil exports. Russia produced 12% of the world’s oil then. By March, Brent crude futures hit $138. The increase in gas prices was not far behind. It reached $5.02 in June 2022. The run-up was fast. The price of a gallon of regular nationwide has been $2 in November.

As the threat of a large military conflict between the US and Iran becomes more likely, Brent has moved from $59 in December to $71 today, and for the time being, it continues to rise.

The US could hit Iran hard militarily within days. It has a large fleet in the area and hundreds of warplanes. Oil just touched a six-month high.

So what happens in the event of a full-scale war, particularly if it goes on for months? Iran can shut down the Strait of Hormuz, or at least make it dangerous for crude shipments. It has been estimated that up to 20% of the world’s rice supply passes through it. According to the EIA, “The Strait of Hormuz is the world’s most important oil chokepoint because of the large volumes of oil that flow through the strait.”

In addition, China buys 80% of Iran’s shipped oil. That has to be replaced with another source. China’s need for crude will change the picture of global demand.

Oil.com says there are some circumstances in an Iran conflict that could add $15 a barrel to current prices. That takes the price to $86. Axios reports that the figure could be much higher.

Then, there is the question of how long a conflict affects oil supply. That is anyone’s guess.

Oil prices are at least three-quarters of the price of gas in the US. And sometimes that is higher. Other factors include state taxes, refinery capacity, and transportation. None of these will mean much if crude has a run-up of 40%, which is the jump needed to reach $100.

Does the Iran conflict trigger a jump in crude oil prices the way the start of the Ukraine conflict did? If the Strait of Hormuz is blocked, it could very well happen. That may take gas prices back to $5.