Despite a temporary ceasefire in the Middle East, Americans are confronting a stark new reality: gasoline prices of $4 per gallon appear to be here to stay.
Even if the two-week truce proposed by President Trump holds, it could take a considerable amount of time for fuel prices to decline. According to data from the American Automobile Association (AAA), drivers from Las Vegas to Seattle are now commonly paying $5 per gallon, while prices in San Francisco and Los Angeles frequently exceed $6.
Daniel Sternoff, a senior research scholar at Columbia University's Center on Global Energy Policy, stated, "The situation hasn't improved much since the ceasefire took effect. Oil shipments through the Strait of Hormuz remain severely restricted."
Why do gasoline prices remain high even as oil prices fall? News of the ceasefire this week triggered one of the most severe single-day sell-offs in crude oil market history. However, U.S. near-month crude futures rebounded to nearly $98 per barrel on Thursday, indicating persistent pressure in the physical crude market. This crude is the feedstock for producing gasoline, diesel, petrochemicals, and other materials.
The actual spot price for crude oil remains significantly higher than futures prices, suggesting that refiners are scrambling to secure supplies. Crude cargoes tracked by Argus Media on Wednesday were offered as high as $145 per barrel.
The higher the cost refiners pay for crude, the more they must charge for refined products, even if forward crude futures contracts are relatively cheaper.
Tom Kloza, Chief Oil Analyst at GasBuddy, commented, "The physical supply chain has indeed been impacted. People are frustrated because the futures market appears relatively stable and orderly." He anticipates that the U.S. national average gasoline price is unlikely to fall below $4 per gallon unless futures prices stabilize in the mid-$95 range. Traders believe this is nearly impossible unless full tanker traffic through the Strait of Hormuz resumes.
Will fuel prices drop as quickly as they rose? AAA data shows the national average gasoline price reached $4.17 per gallon on Thursday, the highest level since the conflict began and a sharp increase from $2.98 per gallon, the price on the day before hostilities commenced with Iran.
Analysts suggest that if the Strait of Hormuz truly reopens, the national average price at the pump could potentially decrease by a few cents per day. However, after periods of high volatility, rapidly rising wholesale costs squeeze station margins. Therefore, retailers typically lower retail prices gradually, only after they have sold through their higher-priced inventory.
Darren Rebelez, CEO of Casey's General Stores, said on a recent earnings call, "When wholesale costs truly hit an inflection point and start to come down, retail prices will follow. But the decline is usually slower, and the margin expands accordingly."
Which regions are most affected? According to AAA data, Hawaii, Idaho, and Utah have seen the most significant price increases over the past month. In California, at the epicenter of the disruption, the average price for diesel reached $7.75 per gallon on Thursday.
Mark Valentino, Head of Commercial Banking at Citizens Bank, stated, "Whether you are a small business owner or a regular company employee, the surge in fuel prices significantly eats into take-home pay." He added that while many businesses can withstand short-term price increases, "if U.S. fuel prices haven't come down by May or June, the situation will become much more challenging."
This rapid surge in fuel prices, one of the most dramatic in modern times, has already cost American consumers billions of dollars in extra spending at the pump. Analysts at J.P. Morgan estimate that if the recent price increases persist until year-end, the total additional cost could reach $100 billion. Should the shipping disruptions in the Strait of Hormuz be prolonged further, this expense would be even higher.
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