With any luck, by the time you read this there will have been some kind of end to the latest crisis in the Middle East. Unfortunately, there is a good chance this situation remains unresolved. Regardless, it is a good idea to review the economic sensitivity of the oil world, as it often behaves in a very peculiar way. If the United States is now the world’s largest exporter and producer of crude oil, what difference does it make economically that oil production in the Middle East has been compromised? 

Five reasons for the price hikes

There are basically five reasons Americans are seeing drastic hikes in fuel prices. Reason No. 1 is that oil is priced globally by the market. Oil is a commodity, and fuel is an inelastic good, meaning consumption varies very little with price. The reality is that we have to use what we use to get where we want to go. A higher price doesn’t mean we stop going to work or anywhere else. It doesn’t mean ships, trucks and trains stop delivering things. Cheaper fuel doesn’t cause us to start driving around aimlessly. 

Investors try to guess what demand shifts might happen, and they buy and sell accordingly—even when the margins are small. The global price is set by Brent Crude, and U.S. pricing looks at West Texas Intermediate. Thus, a disruption in one part of the world affects the entire global economy.

Reason No. 2 is that while the United States may be a major crude oil producer and distributor, the country is woefully behind when it comes to refined product. It imports about 2 million barrels a day (roughly $60 billion worth in 2024). Despite this, the United States also imports some crude (roughly 6.5 million barrels a day), for several reasons. The world of crude is very complex, with dozens of grades. The United States produces many, but not all, of them, and needs to import the necessary kind. Remember that petroleum products include everything from fuel to plastics, fertilizer, clothing and hundreds of other products. 

Meanwhile, transportation issues abound. Only one good pipeline system connects the oil-producing regions to the East Coast (the Colonial), and it is often cheaper for refineries in the East to buy oil shipped by tanker. Most of the refined product imported comes from Canada, South Korea, Mexico, the Netherlands and India.

Reason No. 3: This crisis is basically a transportation issue. There is plenty of oil available in the world right now. In fact, the issue just over a month ago was an oil glut. The Energy Information Agency had been predicting oil prices as low as $45 or $50 a barrel. That is actually too cheap for U.S. oil producers to remain profitable, and it was feared there would be a repeat of the “Houston Recession,” which resulted in many oil operations shutting down. 

The problem is transportation. Getting oil from the Middle East relies on tankers, and the war has effectively shut down the Strait of Hormuz. Iran is disrupting ship movements with drones and missiles, which are hard to defend against, as well as GPS jamming and naval mines. Even naval escorts are inadequate. A few months ago, a tanker was trying to move through the Red Sea to the Suez Canal, escorted by U.S. and British destroyers. Houthi rebels from Yemen tried attacking the tanker with cheap drones. While 99% of them were shot down, one got through and punched a hole in the ship, causing a major oil leak. 

Here is the problem: the insurance company covering that tanker was on the hook for the spill, which cost multimillions. Currently, the insurance industry will not cover ships going through the contested area, and no shipper in their right mind will dare move without insurance coverage.

Reason No. 4 is really about inflation. Nothing moves the inflation needle like oil. Beyond affecting transportation, oil prices affect fertilizers, pesticides and herbicides—so farming gets crushed when oil prices spike. The hundreds of other petroleum-­based products are also affected—it’s ubiquitous, to say the least. The inflation that everybody was worried about had not really manifested this year, but that was only because the price of fuel had stayed low. Food prices, rent, wages and more rose, but the price at the pump remained under control. That break has ended as the national average climbs over $4 a gallon and is unlikely to fall much this year.

Reason No. 5 is politics and the desire to push a variety of geopolitical agendas. Iran has been a source of geopolitical stress, with threats against U.S. allies in the region, backing of terrorist groups such as Hezbollah and Hamas, and suspected development of nuclear weapons. Was there evidence that Iran was an imminent threat? Opinions vary widely, but many agreed that Iran has been a “bad actor” for decades. 

Was now the ideal time to try changing the situation? Earlier this year, Iran was rocked by demonstrations by an increasingly frustrated population—protests that were put down brutally (more than 7,000 people were killed). Around 60% of Iran’s population is under 30 and desires economic progress. Is this enough to support a change in leadership? The lack of a definitive plan for next steps has the global economy on edge. 

How long does all this last? That is the billion-dollar question. Given the variables, this is a conflict that could end in a day or so or it could drag on for months. 

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