Rising tensions between the United States and Iran are driving oil prices higher, potentially pushing the average price of gasoline in the US back above $4 per gallon.
Over the past two days, traders on the prediction market platform Kalshi have significantly increased their bets on this outcome. The probability of the US average gasoline price exceeding $4 per gallon has risen to 93%, while the chance of it surpassing $4.10 is now at 63%.
Furthermore, the likelihood that prices will climb above $4 per gallon before the end of this month has surged from 56% to 90%. This contract predicts the national average gasoline price for July, with the final settlement based on data published by the American Automobile Association (AAA).
According to AAA, the national average price on Wednesday was $3.89 per gallon, an increase of about 3 cents from Tuesday. Patrick De Haan, head of petroleum analysis at fuel price monitoring platform GasBuddy, similarly forecasts that the national average will return to the key psychological level of $4 per gallon within 7 to 10 days.
While the average price breached $4 per gallon last month, the peak so far this year occurred on May 21st, reaching $4.56. However, Kalshi traders see a very low probability, less than 5%, of prices exceeding $4.50 again by month's end.
The market's wager on rising fuel costs stems from the recent escalation in US-Iran hostilities. Since July 11th, US military forces have conducted strikes against Iranian targets for five consecutive days.
On July 15th, the US launched two waves of attacks, with stated objectives "aimed at degrading Iran's ability to control the Strait of Hormuz." In response, Iran has carried out sustained strikes against multiple US military bases across the Middle East in recent days, targeting facilities in Bahrain, Jordan, and Kuwait.
In a July 14th interview, US President Donald Trump threatened to strike Iranian energy facilities and bridges until they "return to the negotiating table," and did not rule out the possibility of deploying ground troops to Iran.
The previous day, during a television appearance, Trump stated the US "might soon" strike Iran's "Fordow" underground nuclear facility near the Natanz uranium enrichment site. On July 15th, Trump suggested Iran wants to make a deal.
In response, Iranian Foreign Ministry spokesman Nasser Kanaani stated that Iran currently has no plans for negotiations and is focused on defense. Kanaani emphasized that the US-Iran understanding is based on mutual commitments, and if one side violates them, Iran will cease its own compliance—a principle it will continue to follow.
He added that Iran's armed forces have demonstrated that any violation of Iranian territory will be met with a corresponding response. Analysts note that the ongoing cycle of mutual strikes has evolved into a prolonged contest for control over the Strait of Hormuz.
In recent days, US strikes have focused on locations with a common characteristic: proximity to the Strait of Hormuz, serving critical functions for Iran's maritime traffic, energy exports, and military deployments. The US strategy appears to be weakening Iran's military and logistical capabilities around the strait through sustained attacks on these maritime nodes.
Iran's counter-response has been to expand its strikes to target US military presence across the Gulf region, while simultaneously strengthening its practical control over traffic through the Strait of Hormuz. Iranian Deputy Foreign Minister for Legal and International Affairs Reza Najafi recently stated that in a state of war, Iran has complete control over the Strait of Hormuz and will not allow this vital waterway to be used for actions endangering national security.
More notably, domestic efforts in Iran are underway to further "legalize" the management of the strait. A bill concerning its long-term administration has been submitted to the Iranian parliament, indicating that some political factions seek to elevate control from a matter of military action and policy to a national legal framework.
For Iran, the Strait of Hormuz has transcended being merely a shipping issue, becoming the most critical strategic asset in its current confrontation with the US. The struggle over the strait is likely to persist as a常态, with neither side showing clear signs of backing down in the short term.
Against this backdrop, shipping through the Strait of Hormuz has stalled again, and international oil prices have risen for three consecutive trading sessions. On Wednesday, WTI crude for August delivery settled at $79.60 per barrel, while benchmark Brent crude for September delivery closed at $84.95 per barrel.
Additionally, recent US exports of refined petroleum products have hit record levels to fill supply gaps in the Middle East, while domestic gasoline inventories are 6% below the five-year average for this time of year.
Alex Huq, policy research director at the left-leaning think tank Groundwork Collaborative and an advisor to the Biden administration, stated there is no current domestic fuel shortage in the US. However, if shipping through the Strait of Hormuz remains stalled, end-user fuel prices will continue to climb.
He added that the strait handles roughly one-fifth of global crude oil and petroleum product shipments. A closure would directly cut global supply, and while releasing strategic reserves and curbing demand could provide a slight buffer, it would not fully offset the loss of millions of barrels per day in shipments.
Gasoline prices are one of the most direct indicators of inflation for American consumers. Although overall prices remain below the historical peak of over $5 per gallon seen after the 2022 Russia-Ukraine conflict, the rapid upward trend itself is enough to raise market alarm.
The swift rise in gasoline prices not only undermines a core political promise of the Trump administration to curb inflation but also casts a shadow over its economic agenda as the midterm elections approach. Analysts suggest sustained high oil prices could disadvantage Republicans in the November elections, where control of Congress is at stake.
Voters are already discontented with high living costs and the administration's economic stewardship. Research by Ryan Cummings and Neil Mahoney of the Stanford Institute for Economic Policy Research indicates that, even accounting for other economic factors, a $1 per gallon increase in gasoline prices correlates with a decline of 4.5 points or more in the University of Michigan's Consumer Sentiment Index.
Cummings, who worked on gasoline policy as an economist on the Biden administration's Council of Economic Advisers from 2021 to 2023, stated this "roughly means that for every $1 increase in the price of a gallon of gasoline, people feel about 5% worse about the economy."
While US price pressures eased more than expected in June, partly due to falling energy costs, the renewed rise in fuel prices could complicate the inflation outlook. Energy industry observers note that although June's inflation data reflected relief primarily from lower energy costs, sustained gasoline price increases in July could quickly reverse this trend.
The impact extends far beyond fuel itself; higher gasoline prices elevate transportation costs, freight rates, and broader logistics expenses, which eventually feed into the prices of goods and services throughout the economy.
Mark Zandi, chief economist at Moody's Analytics, warned that if the Middle East situation escalates and the Strait of Hormuz remains largely closed for weeks, global oil inventories are expected to decline further. In such a scenario, prices for oil, gasoline, and other energy products would spike sharply, leading to physical supply shortages worldwide.
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