Strait of Hormuz Closure: Oil Price Surge Risks

The potential for sustained closure of the Strait of Hormuz is raising concerns about a significant surge in global oil and gas prices. Economists are warning of “extremely plausible” scenarios where crude oil could reach $150 to $200 per barrel, impacting consumers worldwide.

Trump's Optimism and Lingering Concerns

President Trump’s comments on Tuesday, suggesting the U.S. war with Iran could end in two to three weeks, initially eased global oil prices and boosted stock markets. However, economists caution that this optimism is fragile and dependent on Iran reopening the Strait of Hormuz. Even a winding down of U.S. military operations won’t necessarily prevent further price increases.

Potential Price Increases

Paul Krugman, a Nobel Prize-winning economist, stated to CBS News, “The scary scenarios are, unfortunately, extremely plausible. It’s not at all hard to tell a $150 story, and it’s not crazy to go to $200.” Bernard Yaros, lead U.S. economist at Oxford Economics, predicts U.S. gasoline prices could climb above $4 a gallon if the strait remains closed. The average gas price already rose to $4.06 a gallon on Wednesday, the highest since August 2022.

Impact on U.S. Consumers

Patrick De Haan, a petroleum expert at GasBuddy, anticipates the average U.S. gas price could reach $4.12 to $4.15 per gallon in the near term. He added, “If the president just foregoes providing clarity or resolution on the Strait of Hormuz, we’re going to continue to see oil prices reacting to the reality.” However, a positive statement from President Trump could potentially cap the price increase.

Iran's Control and Reduced Oil Flow

Strait of Hormuz Traffic

Since the beginning of the Iran war in late February, over 70% of ships transiting the Strait of Hormuz have been owned by or linked to Iran, or traveling between Iranian ports, according to Lloyd’s List Intelligence. Normally, 20 million barrels of oil flow through the strait daily, but this volume has been reduced by as much as 16 million barrels due to the conflict.

Economic Factors

Economists emphasize that the lack of direct substitutes for oil and the ‘inelastic’ demand for crude mean a prolonged closure would significantly drive up prices. Key factors influencing prices include the volume of oil able to traverse the Persian Gulf and how purchasers respond to higher costs.

Expert Forecasts and Long-Term Risks

Bridget Payne, head of oil and gas forecasting at Oxford Economics, expects oil prices to exceed $150 a barrel within weeks if the strait remains unsafe. Matt Bernstein, an oil and gas analyst at Rystad Energy, believes oil prices will remain elevated even if the U.S. withdraws forces, citing increased geopolitical and financial risks. He stated, “Even if the conflict did wind down…there is no going back to pre-war normal.”

Roughly a fifth of the world’s oil and natural gas supply passes through the Strait of Hormuz daily. Despite efforts by the Trump administration to boost oil supplies, these measures are insufficient to offset the significant disruption caused by the reduced flow through the strait.