Jono Maryono
The tentative agreement to de-escalate the conflict between the United States and Iran, a development that has sent shockwaves through global energy markets, has resulted in oil prices falling to a three-month low. This sharp decline is largely attributed to the burgeoning optimism that the vital Strait of Hormuz, a critical chokepoint for global energy transit, will soon reopen to regular maritime traffic. However, despite the immediate impact on commodity markets, American consumers should not anticipate a rapid or substantial reduction in prices at the petrol pump, with experts cautioning that a return to pre-conflict levels could take many months, if not longer.
The closure of the Strait of Hormuz, a strategic waterway through which approximately one-fifth of the world’s oil and liquefied natural gas normally flows, had profoundly disrupted global energy markets for over three months. This disruption led to significant price hikes and supply chain anxieties worldwide. In the wake of the preliminary deal, U.S. President Donald Trump has repeatedly expressed confidence that oil prices would plummet once the strait is fully operational again, predicting a rapid return to more affordable levels. Yet, seasoned analysts urge a more measured outlook, suggesting that the path to price normalization is fraught with complexities that will extend the period of elevated consumer costs.
While Asian markets, which are more heavily reliant on oil transported through the Strait of Hormuz, bear a significant portion of the immediate impact, the global tightening of supply and persistent demand have contributed to price increases across all major economies. In the United States, as of Monday, the average price for a gallon of gasoline remained above the $4 mark, standing at $4.06 according to the American Automobile Association (AAA). This represents a notable decrease from the early May peak of $4.48 per gallon, but still significantly higher than the $2.98 per gallon recorded on February 28, the day the conflict between the U.S. and Iran initially escalated.
The ripple effect of the conflict on energy prices has been substantial for American households. Recent inflation reports from the Labor Department’s Bureau of Labor Statistics indicated that energy prices in the U.S. had surged dramatically in recent months, with a 7.7 percent increase in the last two months alone, and a staggering 40 percent rise compared to the same period a year ago. The recent downward trend in prices began as diplomatic overtures between Washington and Tehran gained momentum.
Patrick De Haan, head of petroleum analysis at GasBuddy, a company that meticulously tracks gasoline prices, noted that the "potential deal that the US and Iran agreed to over the weekend certainly could pave the way for even lower prices… in the next two to three days by what we saw over the weekend." However, De Haan’s projection for a more sustained price plateau suggests that consumers might not see gasoline prices return to pre-conflict levels until 2027, even if the ceasefire holds firm.
The recovery of global oil inventories to pre-conflict levels is anticipated to be a protracted process. De Haan estimates that "it may take many months, if not beyond a year, for global oil inventories to recover to pre-war levels." This extended timeline is influenced by several critical factors, including the time required for producers to ramp up output, persistent bottlenecks at shipping ports, and the surge in demand typically experienced during the peak summer travel season.
John Deal, managing director of capital markets at the Post Oak Group investment bank, highlighted these mitigating factors. "There are a lot of organisations and companies that have to re-up their stockpiles [like the U.S.’s strategic petroleum reserve] and fulfil contracts that have been on hold for the last few months," Deal explained, underscoring the complex web of obligations that need to be addressed before a full market normalization can occur.
Supply Chain Strains and Production Ramp-Up
The intricate process of rectifying the kinks in the global oil supply chain is inherently time-consuming. The conflict had led to a significant slump in oil production, with the International Energy Agency reporting that over 14 million barrels per day, or approximately 14 percent of the world’s daily demand, had been taken offline. Deal emphasized that "it would take time to get oil production back online."
Forecasting a sustained high demand throughout the summer, Deal anticipates that a return to pre-conflict gasoline price levels is unlikely before "after the summer, maybe September or October." This projection is further informed by the cautious approach many oil producers are expected to adopt.
Mark Jones, a professor of political science at Rice University, suggested that producers may exhibit reluctance in fully resuming operations until the ceasefire proves its stability. "Many [producers] may be reluctant to restart production until they are convinced that the peace will hold, because the last thing they want to do is carry out the costly effort to restart production only to see the conflict revived and then have to shut it down once again," Jones told Al Jazeera. The current agreement, which is slated for a 60-day negotiation period between the U.S. and Iran, adds an element of uncertainty to long-term production commitments.
The speed at which production can be restored also depends on the individual impact each producer has faced during the conflict. Bader Nooruddin, head of research at Vitol Bahrain, informed Reuters that refineries that were shut down as a precautionary measure could potentially reach up to 95 percent capacity within 40 to 60 days. However, refineries that sustained damage during the conflict could require significantly longer to become operational again.
Bottlenecks at Ports and Shipping Constraints
Beyond production issues, significant logistical hurdles remain, with port bottlenecks identified as potentially the most substantial impediment to a swift price recovery. "There’s a lag time with shipping capacity. Shipping capacity is perhaps the most significant constraint," Deal stated. The backlog is substantial, with over 500 ships reportedly awaiting passage through key maritime routes, according to shipping data compiled by Kpler.
The sheer volume of delayed shipments means that even after the Strait of Hormuz reopens, it will take weeks for these vessels to reach their destinations, dock, and unload their cargo. This, in turn, creates a cascading effect, with a wave of empty ships waiting for berths at ports to load new cargo and resume normal operations. Major shipping companies, including Norway’s Wallenius Wilhelmsen and Denmark’s Maersk, have indicated to Reuters that they have not yet altered their Middle East operations in response to the news, reflecting the ongoing uncertainty and the time lag involved in recalibrating global shipping schedules.
During the height of the conflict, maritime traffic through the Strait of Hormuz was severely restricted, with an average of only 10 ships transiting daily, a stark contrast to the usual average of 135 ships, according to an analysis by Bloomberg. Jones elaborated on the shipping timeline, stating, "Tankers take months to reach their final destination and then come back again. So the ability to replenish the stocks is going to take until, I think, the early fall, just from a shipping perspective, to get back to the status quo that was in place before the conflict started." The term "early fall" in North America typically refers to the months of September through November.
Depleted Strategic Reserves and Summer Demand Pressures
Adding another layer of complexity, the United States’ strategic petroleum reserves are at their lowest levels since 1983, having declined by 18 percent since the conflict began. This depletion means that the U.S. has less buffer stock to draw upon, potentially exacerbating demand pressures and keeping prices elevated through the summer as efforts to refill these reserves commence.
The upcoming summer travel season in the U.S., typically characterized by a surge in demand for air travel, will also exert upward pressure on fuel prices. The conflict has significantly impacted airlines’ ability to plan and forecast their operations. In April, Scott Kirby, CEO of United Airlines, warned that airfares might need to increase by as much as 20 percent due to higher fuel costs.
Broader Economic Repercussions: From Petrol to Groceries
The economic fallout from the conflict extends beyond fuel costs, significantly impacting household budgets, particularly at the grocery store. The most recent consumer price index report revealed a 4.2 percent increase in U.S. inflation compared to the previous year. While fuel prices were the primary driver of these inflationary pressures, the impact has been palpable for consumers purchasing everyday necessities.
The Strait of Hormuz is a critical transit route for nearly half of the world’s urea, a key component in fertilizer production, which is largely produced in the Gulf region. This disruption has made access to fertilizers more expensive for American farmers, potentially affecting future crop yields and costs.
Furthermore, tomato prices, which were already elevated due to previous tariffs on Mexico, have surged by 40 percent over the past year, a rise attributed in part to increased transportation costs. Lettuce prices saw a rise of over 16 percent in May, and the price of ground beef increased by approximately 12 percent compared to the same period last year.
Jones issued a cautionary note regarding the potential for food prices to remain elevated. "Many retailers, wholesalers, and producers will keep them where they are or only reduce them if forced to from a sales perspective. Unlike petrol, which tends to ebb and flow with the price of oil, prices for many other goods that have been adversely affected by all of this are much less likely to return to where they were prior to the start of the conflict," he stated. Jones further posited that for many goods, "the price that is there now often becomes the new baseline from which prices move in the future."
This phenomenon echoes patterns observed during the COVID-19 pandemic, when supply chain disruptions led to price increases that, in some instances, became permanent even after the initial constraints eased. A 2024 investigation by the Federal Trade Commission noted that some retail grocers appeared to have leveraged rising costs as an opportunity to further increase prices and boost their profit margins. This suggests that while the immediate shock of the conflict may subside, its long-term inflationary impact on a wider range of goods could persist, presenting ongoing challenges for American consumers.
