The price of oil surged higher and showed no signs of halting its rapid climb a week after the US and Israel launched major attacks on Iran that escalated into a war in the Middle East.
The conflict, in which nearly every country in the Middle East has sustained damage from missiles or drone strikes, has left ships that carry roughly 20 million barrels of oil a day stranded in the Persian Gulf, unable to safely pass through the Strait of Hormuz, the narrow mouth of the Gulf that is bordered on its north side by Iran.
The shipping disruption and damage to key Middle East oil and gas facilities has interrupted supplies from some of the world’s largest oil producers. Kuwait, for example, said on Saturday that it would reduce its oil production as a “precautionary” measure due to the war, which could jolt global energy markets even further.
Oil prices surpassed $90 a barrel Friday, with American crude settling at $90.90, up 36 per cent from a week ago, and Brent, the international standard, climbing 27 per cent over the course of the week to land at $92.69.
The fallout is ratcheting up what consumers and business will pay for gasoline, diesel and jet fuel, with some drivers already feeling it at the pump.
“It’s crazy. It’s not needed, especially at a time when people are already struggling, but not unexpected from all this turmoil that’s going on,” said Mark Doran, who was pumping gas in Middlebury, Vermont Friday. “I don’t think there’s been an end in sight to any Middle East conflict that’s been started by us, so the fact that they say that there’s going to be an end that quickly is not believable, and the Middle East is, you know, a place that the US is not going to solve.”
President Donald Trump said Monday that the US expected its military operations against Iran to last four to five weeks but has ” the capability to go far longer.” On Friday, Trump appeared to rule out talks with Iran absent its “unconditional surrender.”
“The more news we get, the more it seems like this is going to last a really long time,” said Al Salazar, head of macro oil and gas research at Enverus.
In the US, a gallon of regular gasoline rose to $3.41 on Saturday, up about 43 cents from a week ago, according to AAA motor club. Diesel was selling for $4.51 a gallon Saturday, up about 75 cents from last week.
The price shocks were felt even more heavily in Europe and Asia, markets that rely more heavily on energy supplies from the Middle East. Diesel prices doubled in Europe, and jet fuel prices rose by close to 200 per cent in Asia, according to Claudio Galimberti, chief economist at Rystad Energy.
Energy prices climbed throughout the week as Iran launched a series of retaliatory attacks, including a drone strike on the US Embassy in Saudi Arabia, and the conflict widened. Iran also hit a major refinery in Saudi Arabia and a liquefied natural gas (LNG) facility in Qatar, halting flows of refined products and taking about 20 per cent of the world’s LNG supply offline.
“We keep seeing news of vessels being hit or refineries or pipelines, so the list is very long,” Galimberti said. As a result, roughly 9 million barrels of oil per day are off the market because of facilities being hit or producers taking precautionary measures, he said. “Right now, with all of this shut in, we are in a situation of extreme deficit.”
The US is a net exporter of oil, but that does not mean it is immune to increases in the price of oil or gasoline, or that its producers can just make up the difference.
Oil is traded on global markets, so even the oil produced in the US has risen in price based on what’s happening in the Middle East. And for many American oil producers, “if you put more wells in the ground, there’s about a six-month lag before you get that production uplift,” Salazar said.
In addition, the US can’t simply turn all of its crude oil into gasoline. That’s because most of the oil produced in the US is light, sweet crude, and refineries on the East and West coasts are primarily designed to process heavier, sour crude. As a result, the US exports some of its crude oil and imports some refined products such as gasoline.
Jerry Dalpiaz of Covington, Louisiana, said he started filling up his cars and gas cans on “the day that they announced that the United States has started military operations against Iran” because he assumed gas prices would climb.
“I can weather the storm because I’m in good financial position, but I feel sorry for my fellow citizens who are living paycheck to paycheck because they have to drive to get to work and they have to change their oil and all those things,” Dalpiaz said. “And they need some relief and it doesn’t seem to be coming anytime soon.”
Trump issued a plan Friday to insure losses up to approximately $20 billion in the Gulf region, aiming to restore confidence in maritime trade, help stabilize international commerce and support American and allied businesses operating in the Middle East.
But some energy experts said extra insurance won’t solve the problem.
“The problem is that in the oil trading, oil shipping world, people are worried about counterterrorism,” said Amy Jaffe, director of the Energy, Climate Justice and Sustainability Lab at New York University, adding that they’re worried about automated drone speedboats, weapon-carrying, flying drones and mines or other devices. “In order for the United States to create the atmosphere that undoes the current bottleneck at the Strait of Hormuz, there has to be some credible demonstration of solutions to the counter-terrorism problem.”
Salazar wondered what the “new normal” would look like if the Strait of Hormuz was effectively re-opened, and what effective security would look like.
“All it takes is one individual with a RPG (rocket-propelled grenade) to stand on the shore and take out a tanker, right?” Salazar said. “And this is forever, do you know what I mean?”
