The Trump administration can have a prolonged war or lower fuel prices, but not both.
President Trump is trying to reassure Americans that lower prices at the pump are incoming, even as the Iran War rages on and the Strait of Hormuz remains effectively closed. But he is wrong. It simply cannot be done.
Approximately 20 percent of the world’s liquid petroleum consumption typically moves through the Strait of Hormuz from countries in the Persian Gulf. Since the war began, that flow has slowed to a trickle. Of the few tankers getting through the Strait, many are sanctioned by Western governments for their ties to Iran. Because the oil market is global, and prices are set by worldwide supply and demand, a sharp decline in oil availability anywhere spikes prices everywhere. The price of crude has jumped by roughly 50 percent, from $67 to nearly $100 per barrel. Consequently, gasoline prices in the United States are up by 30 percent.
That is what happens when a fifth of global oil supply goes offline. When parts of the world — mostly Asia and Europe, in this case — can’t get energy from where they used to, they have to buy it elsewhere. With more buyers chasing a reduced supply, oil prices have to rise for the market to clear. Petroleum is a very sticky commodity, meaning it takes a large price increase for consumers to purchase less of it. For the world to reduce its petroleum consumption by around 20 percent, the price needs to go up enormously. And so it has.
There is precisely one solution to this problem: dramatically increase the global supply of oil. The Trump administration seems to understand this. It is focused on reopening the Strait of Hormuz by stopping Iranian attacks on tankers — perhaps through an international military coalition, or Navy escorts of commercial ships, or even ground forces along the Strait.
At the same time, Trump has taken several other measures to boost energy access that don’t involve the Strait of Hormuz. They all represent drops in the ocean that is the global oil supply. None will do much of anything to ease fuel prices here at home.
One policy he implemented is to waive the Jones Act’s protectionist shipping requirements for 60 days, allowing foreign tankers to transport fuel between U.S. ports. That is good policy — in fact, the Jones Act should be permanently repealed — but the price effect will be negligible. The main effect of the waiver will be to redirect scarce energy from regions where gas prices are relatively lower, such as the Gulf Coast, to regions where they are higher, such as the Eastern Seaboard. Still, it is estimated to decrease gas prices by just two to ten cents on the East Coast.
Trump has also ordered the release of 4o percent of the U.S. Strategic Petroleum Reserve, or 172 million barrels of oil. That is part of a broader international commitment for countries to release 400 million barrels. The problem is that the world consumes more than 100 million barrels of oil every day. With global supply having fallen by one-fifth — approximately 20 million barrels a day — these releases could fill the gap for 20 days, or less than three weeks.
Finally, the administration is easing sanctions on Russian, Venezuelan, and even Iranian oil to increase access. Yet much of this petroleum already reaches customers through shadow fleets and sanctions evasion. Redirecting it to Western-aligned countries leaves less fuel available for existing buyers, China and India most of all. Those countries must then buy more oil from other countries, which pushes global prices back up.
In a world of finite oil supplies, easing pressure at any particular point will raise it elsewhere. Only the worst ideas remain. Capping energy prices would result in shortages. Banning petroleum exports would backfire on America by further disrupting established trade patterns. A windfall profits tax on oil companies would discourage domestic production.
There’s no way around it: So long as the Strait of Hormuz is closed, global energy supplies will remain far scarcer than before the war. And, so long as that is the case, fuel prices at home will remain elevated. The Trump administration can have a prolonged war against Iran, or it can have lower gasoline prices. It cannot have both.