How the Strait of Hormuz Affects Price of Filling Your Gas Tank

Courtesy of South Carolina Daily Gazette

On paper it makes little sense. Ship traffic through the Strait of Hormuz, roughly 7,000 miles from the United States, is restricted and gasoline prices in this country soar? 

The strait is the major export route for oil produced by Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Iraq, Bahrain and Iran, according to the International Energy Agency. But since Feb. 28, when the Iran war began and the narrow passageway between Oman and Iran became a battleground, U.S. gasoline prices have soared — and the prices of consumer products and services are poised to jump as well. 

Most oil passing through the strait goes to Asian markets, according to the U.S. Energy Information Administration. And due to greater domestic production, the U.S. is importing less crude oil from the Persian Gulf than it has in 40 years, EIA said in a March analysis.

So why are U.S. consumers paying so much more for gasoline? Globalization.

“Supply disruptions anywhere in the world can also affect prices everywhere in the world because we live in a global market,” explained Jeff Lenard, a vice president of the trade group National Association of Convenience Stores. “Oil and refined products like gasoline are traded on the commodities markets. Places with short supply are willing to pay more for product. That drives up the global price.”

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

“It’s because the price of oil is based on how much is available in total. Since oil from there is in short supply, the rest of the oil all around the world becomes more expensive,” De Haan said.

A gallon of regular gasoline Monday cost an average of $4.52, according to AAA up from $4.14 a month ago and $3.14 a year ago. Consumer prices overall were up 0.9 percent in March and were averaging 3.3 percent higher over the past year.

While the Middle East oil disruption affects prices throughout the world, retail pump costs can vary dramatically from state to state across the U.S.

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

The price of crude oil is the biggest part of the price consumers pay at the pump. EIA estimates that it makes up 51 percent of the retail cost. Distribution and marketing account for 11 percent, refining costs and profits 20 percent and federal and state taxes 18 percent.

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