Trump’s Iran Shift & Why Gas Prices Aren’t Falling Yet
Oil prices plunged Monday after President Donald Trump announced the United States is in negotiations with Iran, a dramatic reversal from earlier threats of military action. While the news spurred a rebound in stock markets, experts caution that relief at the gas pump is unlikely to be immediate.
The average U.S. Gasoline price is nearing $4 a gallon, and the cost of diesel fuel has surpassed $5, impacting shipping and transportation costs nationwide. A sustained drop in prices hinges on several factors beyond simply a cessation of hostilities, including the reopening of the Strait of Hormuz, a full restoration of Iranian oil production, and the complex process of lower crude prices filtering through the supply chain.
Speaking to CNN’s Kaitlan Collins, Trump stated that the Strait of Hormuz, a critical waterway for global oil transport, would soon be open to tanker traffic if negotiations prove successful. He further suggested a joint U.S.-Iran control of the strait, stating, “Me and the Ayatollah.” This admission underscores a key dynamic: current control of the strait rests with Iran, a position leveraged significantly after its effective closure caused widespread economic disruption.
Helima Croft, head of global commodity strategy at RBC Capital Markets, offered a skeptical assessment, quipping, “It takes two to TACO,” a Wall Street acronym referencing Trump’s tendency to back down from confrontation. “I don’t buy that it is the beginning of the end,” she added.
Iran’s closure of the Strait of Hormuz echoes China’s earlier decision to restrict rare-earth exports to the U.S. During the Trump administration’s trade war. In both instances, the Trump administration underestimated the willingness of a nation to accept economic self-harm to gain a negotiating advantage, according to analysts.
Complicating the negotiation process is uncertainty surrounding Iran’s current leadership structure. Trump indicated talks were underway with “a top person” and that agreements had been reached on “major points.” Yet, Energy Secretary Chris Wright acknowledged to CNBC on Monday that identifying the appropriate negotiating counterpart within Iran is proving difficult. “There’s been a lot of turnover in (Iran’s) energy leadership,” Wright said. “That’s one of the things we’ll learn here in these dialogues: Who is in power?”
Iran’s Foreign Ministry spokesperson Esmaeil Baghaei has denied that any negotiations took place with the United States.
Should negotiations succeed and Iran fully reopen the Strait of Hormuz, oil prices are expected to fall sharply. Trump’s initial announcement already triggered a roughly 7% drop in oil prices Monday. However, significant damage to regional infrastructure, including gasoline refineries, will impede a swift return to pre-war price levels.
Qatar reported that Iranian bombardment of its Ras Laffan liquefied natural gas port – the world’s largest – last week caused extensive damage that will grab years to repair. Many energy production facilities, while undamaged, were temporarily shut down due to the closure of the Strait of Hormuz, and restarting production will take weeks.
“Turning on and off the oil spigot is not the same as switching on and off your lights,” noted Joe Brusuelas, chief economist at RSM US. “It’s a minor engineering feat.” Experts estimate it will take three to four months after hostilities cease before oil and gas production returns to pre-war levels.
Even with increased supply, the process of translating lower crude prices into lower gasoline prices is often slow. Insurance companies will need assurance that oil tankers can safely navigate the mined waters of the Strait of Hormuz. Refineries must then process the cheaper crude, and wholesalers and gas stations must pass the savings on to consumers. This dynamic, often described as “rockets and feathers,” means prices rise quickly with oil increases but fall slowly when oil prices decline.
Former President Joe Biden expressed frustration with this phenomenon in 2022, noting that gas prices remained around $4.30 a gallon even after oil prices fell by more than $20. High gas prices have a significant impact on household budgets, adding approximately $1,000 per year for every dollar increase at the pump, according to Mark Finley, a nonresident fellow at Rice University’s Baker Institute and a former BP economist. “It’s the only price that screams at you from every street corner,” Finley said. “The price of gasoline matters in many different ways — most importantly for consumers’ pocketbooks.”