How the Strait of Hormuz affects the price of gas

On paper it makes little sense. Shipping traffic through the Strait of Hormuz, about 7,000 miles from the United States, is restricted and gasoline prices are rising here?

The strait is the main export route for oil produced by Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Iraq, Bahrain and Iran International Energy Agency. But since February 28, when the Iran War began and the narrow passage between Oman and Iran became a battlefield, gasoline prices in the U.S. have skyrocketed — and the prices of consumer goods and services are expected to rise, too.

According to the US Energy Information Administration, most of the oil that flows through the strait goes to Asian markets. And because of higher domestic production, the U.S. is importing less crude oil from the Persian Gulf than it has in 40 years. The EIA said this in a March analysis.

Why are US consumers paying so much more for gas? Globalization.

“Supply disruptions anywhere in the world can also impact prices around the world because we live in a global market,” said Jeff Lenard, vice president of the trade group National Association of Convenience Stores. “Oil and refined products like gasoline are traded on commodity markets. Places with tight supplies are willing to pay more for the product. This drives up the world price.”

Gas prices are tied to global supply and demand for crude oil, meaning a disruption in supply can have an impact anywhere, said Patrick De Haan, head of petroleum analysis at GasBuddy, which tracks gas prices.

“That’s because the price of oil depends on how much is available overall. Because oil from there is scarce, the rest of the world’s oil becomes more expensive,” De Haan said.

A gallon of regular gasoline averaged $4.52 on Monday. according to AAA from $4.14 a month ago and $3.14 a year ago. Overall, consumer prices rose 0.9% in March and an average of 3.3% over the past year.

Analyze prices

While the Middle East oil crisis is impacting prices around the world, the cost of retail pumps in the United States can vary dramatically from state to state

The average Monday in California was $6.16, the highest in the country. AAA reported. Next were Washington at $5.76 and Hawaii at $5.65. The lowest averages were in Oklahoma ($3.95), Mississippi ($3.98) and Arkansas ($4).

The price of crude oil makes up the majority of the price consumers pay at the pump. The EIA assumes that this is the case 51% of retail cost. Sales and marketing account for 11%, refining costs and profits account for 20% Federal and state taxes 18%.

This means that dramatic changes in the price of crude oil have a huge impact on retail prices.

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The National Association of Convenience Stores Estimates suggest that every dollar the price of oil rises at the pump could be 2.4 cents per gallon.

Brent crude oil, the global benchmark, was $70.50 the day before the US and Israel attacked Iran. On Monday morning it was more than $104.

The $34 per barrel boost since the start of the war would represent an boost of 82 cents per gallon.

Competition can prevent prices from rising too much. No gas station wants to be an outlier and project much higher prices than those across the street.

Taxes and gasoline prices

There are other factors that affect gas prices, particularly taxes, which vary from state to state.

The federal tax on gasoline has been 18.4 cents per gallon since 1993. President Donald Trump said Monday he supports freezing the tax but did not provide a timeline. A suspension would require congressional approval, and Republican leaders have historically been reluctant to accept a pause.

While the average state tax is 33.55 cents per gallon, it varies widely. California’s taxes and fees are estimated at 70.9 cents per gallon, the highest in the country. The lowest tax and fee rate in Alaska is 9 cents per gallon.

California’s costs are also driven up by other factors, including strict environmental standards. The state requires a special blend of gasoline that is supposed to improve air quality.

“This fuel burns cleaner but is more expensive to produce because it requires more processing steps and expensive blending components.” EIA said.

Another reason for the higher prices is California’s dependence on state refineries. Proximity to interstate utilities is not as great as other states

Ripple effects

Before the war, about 20% of the world’s oil flowed through the strait. However, it is unlikely that reopening the strait would lead to sudden price drops.

“In complex supply chains, a disruption in a critical link can, even if only briefly, spread throughout the system far beyond the original event.” Pinar Keskinocakprofessor at the H. Milton Stewart School of Industrial and Systems Engineering at Georgia Tech said in an analysis. “As delays continue and worsen, it often takes a long time for networked systems to recover, rebalance and return to normal.”

“I don’t expect there to be an open flood of barrels leaving the region,” said Jerome Dortmans, co-head of global oil and products trading at Goldman Sachs Global Banking & Markets. in an analysis.

And if the Iran crisis continues and the Strait continues to be restricted, more pricing problems are likely to come.

“A prolonged disruption to oil trade in the Middle East would create conditions in the oil market that have no precedent in history,” said a March report from the Nonpartisan Congressional Research Service.