With the United States and Iran arriving at a “memorandum of understanding” to end hostilities, President Donald Trump seems to think petroleum prices will come down immediately. “Let the oil flow!” he wrote on social media. But while average gas prices did fall just below $4 per gallon after the deal was signed, economists say extended relief from high prices could take much longer to arrive.
When will oil prices come down?
Drivers might expect that gas prices will start to lower as soon as the deal with Iran is inked, but they “will probably have to wait weeks, or longer, to see meaningful improvement,” said The New York Times. Gas prices often fluctuate in an “up like a rocket, down like a feather” manner, meaning “gasoline costs quickly rise alongside the price of crude oil but are slow to follow its descent.” Gas stations tend to lose money when the price of gas goes up, so when oil starts to “go down, station owners are slow to bring retail prices down to make up for their poor financial performance on the way up.”
Trump is also hopeful that the reopening of the long-contested Strait of Hormuz, and the reactivation of its oil-shipping lanes, will help ease the price burden. But there is a “big difference between reopening the Strait of Hormuz on paper and actually resuming the flow of oil through it,” said The Atlantic. While a small number of ships have started traversing the strait, the U.S. and Iran are “far apart on crucial issues, including Iran’s nuclear program,” which could “dissuade oil producers from resuming operations, insurance companies from reducing currently sky-high rates and ‘Ships of the World’ from starting their engines.”
Once ships do start moving again, there will be a “gradual process of resuming east-west traffic, with international actors providing additional support,” Gregory Brew, a senior analyst on Iran and oil at the Eurasia Group, told Intelligencer. But it will “take longer — probably between three and four months — for the region to return to normalcy.” Many countries in the Middle East besides Iran have had their oil production affected. In Saudi Arabia, virtually “all oil production has been shut-in” or capped, said Brew. So a “full return to pre-war production and refining levels is likely to take weeks, months or even years,“ said Reuters.
What is the bigger picture?
Fas prices presumably staying high for a while could affect more than just the gas itself. Republicans are “hopeful prices will soon ease near pre-war levels” because the midterms are on the horizon, said Politico. Even if prices go down, voters may carry negative thoughts about Trump’s economy with them into the voting booth.
Other economic elements that rely on petroleum will still be affected as well, most notably airline travel. Aviation experts “have spent months warning that even if the war ended, travelers should not expect airfares to go down immediately,” said The Associated Press. Airlines often buy fuel in advance and adjust their schedules according to demand, meaning “lower oil and jet fuel prices can take weeks or months to get factored into the cost of commercial flights.”
Fuel prices remaining elevated will also affect the grocery aisle. Fuel accounts for 15% to 30% of the total price of food, according to the Independent Grocers Alliance. It “can take months for an energy shock like the one caused by the Iran war to wind through the food supply chain and raise grocery prices,” said the AP. Food, much like gas and travel, may be expensive for a long time to come.
Trump hopes oil prices will come down immediately, but economists say this probably won’t happen
