Now that Iran has announced the closing of the Strait of Hormuz – are you curious about how you’ll be affected?
I was – and after I had a commentor say that since we make our own oil, we wouldn’t be affected – I decided to do a deep dive. That’s the kind of thinking that sounds logical until you understand how oil markets actually work.
Spoiler alert: your gas prices are absolutely going to spike.
Since around 2020, the US became a net petroleum exporter. We produce about 13.4 million barrels per day and consume around 20 million barrels daily. The math seems simple – we import some oil because we use more than we make, but we’re largely self-sufficient, right?
Wrong. And here’s why that reasoning falls apart faster than your New Year’s resolutions.
https://rachelandthecity.threadless.com/
The US imports only about 0.5 million barrels per day from Persian Gulf countries through the Strait of Hormuz, accounting for just 2% of US petroleum consumption. So logically, blocking the strait shouldn’t matter much to us. But oil markets don’t operate on logic – they operate on global supply and demand.
Oil is essentially a global auction. The highest bidder wins the available supply, and when markets are tight, bidders must pay higher prices. About 20 million barrels per day flow through the Strait of Hormuz – roughly 20% of global oil consumption. When you suddenly remove 20% of global supply, prices don’t just go up – they skyrocket.
Citigroup estimates Brent crude could jump to around $90 per barrel if the Strait of Hormuz closes. But that’s the conservative estimate. Some analysts suggest oil prices could climb far above $100 a barrel, with worst-case scenarios reaching $150+ per barrel. For context, oil is currently trading around $74 per barrel.
Crude oil accounts for 52% to 61% of the cost of a gallon of gasoline. That means when crude oil prices double, your gas prices don’t just nudge up – they surge.
The relationship is direct and immediate. Since the 2020 COVID-19 recession, crude oil prices have explained more than 90% of the variation in gasoline prices. Gas stations aren’t charitable organizations – when their replacement costs go up, pump prices follow within days.
If oil jumps from $74 to $150 per barrel (roughly doubling), you’re looking at gas prices potentially increasing by $1.50 to $2.00 per gallon or more. That $3.50 gas becomes $5.50 gas real quick.
“But wait,” you’re thinking, “can’t we just use more of our own oil?” Here’s the problem with that logic.
First, the United States still imported about 6.28 million barrels per day of crude oil in 2022 while exporting about 3.58 million barrels per day. We import specific types of crude oil that our refineries are designed to process, and we export different types that other countries need.
Second, our refineries are located in specific places – many along the Gulf Coast where they can easily process imported oil. You can’t just flip a switch and redirect all that infrastructure overnight. The logistics of oil refining and distribution make the system far less flexible than most people realize.
Third, even if we could theoretically use only domestic oil, the global price still sets the market rate. Oil companies aren’t going to sell their crude at a discount to American refineries when they can export it at global prices.
When Hurricane Katrina hit the Gulf Coast in 2005 and disrupted oil production, oil prices rose from around $60 to more than $70 per barrel. That was a regional disruption affecting a fraction of what closing Hormuz would impact.
About 80 million metric tons, or 20% of global LNG flows, also go through the Strait every year. So it’s not just gasoline – heating costs, electricity prices, and the cost of basically everything that gets transported will increase.
Your grocery bill, your commute, your heating costs – they’re all connected to global oil markets whether you like it or not. The idea that American energy independence insulates us from geopolitical oil shocks is comforting but wrong.
Iran closing the Strait of Hormuz is like removing every fifth gas station in the world overnight. Sure, there would still be gas stations left, but good luck getting a reasonable price at any of them.
So the next time someone tells you that US oil production means we don’t need to worry about Middle Eastern oil politics, remind them that in a global economy, everyone pays global prices. And right now, those prices are about to get a lot more expensive.