The oil spike everyone feared never showed up
The oil price spike feared after the US and Israel struck Iran on February 28 did not materialize, with Brent crude futures peaking at $126 a barrel, below the 2008 record of $147. The national average for regular gas peaked at $4.56 a gallon in May, but has since retreat…
Intelligence analysis by Llama
The oil price spike feared after the US and Israel struck Iran on February 28 did not materialize, with Brent crude futures peaking at $126 a barrel. The national average for regular gas peaked at $4.56 a gallon in May, but has since retreated to prewar levels near $70 a barrel.
Imagine you're planning a road trip, and you're worried about how much gas will cost. Some people thought that a war in a important place called Hormuz would make gas super expensive. But it didn't happen. The price of gas went up a little, but not as much as people thought it would. This is because some countries, like China, started using less gas, and others, like the US, started producing more. It's like when you're planning a trip and you're worried about traffic, but it turns out the roads are actually pretty empty.
Analysis
What 5 months of war actually did to oil prices
The textbook definition of a supply shock is a closed Hormuz, which carries roughly a fifth of the world's oil and refined products. Before the war, 100 to 130 ships passed through the waterway daily, according to AAA. Traffic has been a fraction of that for most of the year.
The textbook says prices go vertical and stay there. However, West Texas Intermediate, the U.S. benchmark, has swung between roughly $68 and nearly $113 since the fighting began, AAA reported. It sat near $85 on Tuesday, July 21.
At the pump, the damage was real but bounded. The national average for regular gas was $2.98 a gallon on February 28, according to AAA. It peaked at $4.56 a gallon in May, but has since retreated to prewar levels near $70 a barrel, Reuters reported.
5 reasons the oil price spike never showed up
The mechanics are not mysterious, and none of the five reasons involve luck, according to Reuters. They involve a market that had far more slack in it than the models assumed.
China was the surprise. The world's largest oil importer cut crude purchases to their lowest in nearly a decade by June, curbed fuel exports and shifted drivers toward electric taxis, the wire service reported.
The United States pumped harder. Domestic crude production hit a record 13.93 million barrels a day by April, and Washington drained the Strategic Petroleum Reserve as part of a record 400 million-barrel release coordinated by the International Energy Agency in March.
Saudi Arabia rerouted. The kingdom pushed far more crude out of its Red Sea port at Yanbu, partly replacing barrels stranded behind Hormuz.
Traders stopped chasing headlines. Liquidity thinned, funds refused to build big bullish positions, and the market went numb to each new announcement out of Washington and Tehran.
What $150 oil would have cost you at the pump
Here is where I ran the numbers, because this is the part that lands in your budget rather than on a trading screen. AAA's own rule of thumb is that every $1 move in crude translates to 2.4 to 2.5 cents a gallon at the pump. Crude accounts for roughly 57% of what you pay for a gallon of regular, according to the Energy Information Administration.
Run the $150 forecast through that. With WTI near $85 now, an extra $65 a barrel works out to about $1.59 a gallon, which would put the national average somewhere around $5.60. The all-time record national average is $5.02, set on June 14, 2022.
The consensus disaster scenario would have blown past the worst pump prices in American history by roughly 60 cents. The $200 version gets uglier. That is about $2.82 a gallon on top of today's price, or a national average near $6.80.
Now put it in household terms. A two-car family burning 1,000 gallons a year would have paid about $1,600 more under $150 oil, and roughly $2,800 more under $200 oil. That is a car payment. It is also, for a lot of households, the entire difference between funding a Roth IRA this year and telling yourself you will start next year.
Key points
- The oil price spike feared after the US and Israel struck Iran on February 28 did not materialize.
- Brent crude futures peaked at $126 a barrel, below the 2008 record of $147.
- The national average for regular gas peaked at $4.56 a gallon in May, but has since retreated to prewar levels near $70 a barrel.
- China cut crude purchases to their lowest in nearly a decade by June, curbed fuel exports, and shifted drivers toward electric taxis.
- The United States pumped harder, with domestic crude production hitting a record 13.93 million barrels a day by April.
The oil price spike never materialized, and the national average for regular gas has retreated to prewar levels near $70 a barrel. This could be a sign that the market is more resilient than expected, and that the impact of the war on oil prices may be less severe than initially thought.
However, the oil price spike could still happen if the war in Hormuz continues or escalates. This could lead to a significant increase in the cost of gas, which would have a major impact on households and the economy as a whole.
