There’s a narrow 21-mile-wide stretch of ocean that, until a few months ago, no one in the U.S. really thought about. On one side, the craggy coast of Iran. On the other hand, the rocky shore of Oman. Two shipping lanes, each about two miles wide, funnel through the middle. On a normal day, hundreds of vessels glide through, carrying about 20 million barrels of oil. That is one of every five barrels burned anywhere in the world, every single day, squeezed through a sliver of water you could paddle across in a good kayak.
That sliver is the Strait of Hormuz. And since late February, it has been the most discussed piece of real estate on Earth. But you already knew that, and you know the background at this point. For the last two months, the strait has functioned more like a tollbooth than a trade route, with Iran alternating between million-dollar tolls, firing on tankers, and briefly declaring the lane open before the U.S. Navy imposed its own blockade on Iranian ports.
But interestingly, none of that action takes place on American soil, nor does the U.S. import a meaningful amount of oil from the Middle East. On paper, we are energy independent, the world’s largest oil producer, and a net exporter of petroleum products. And yet the national average at the pump sits just above $4 a gallon, up from $2.98 the day before the first missiles flew. In California, the average price is flirting with $6. So how does a conflict on the other side of the planet, in a waterway that ships none of our oil, end up charging every American family a surtax every time they fill the tank?
The Bathtub Example
A Yale economist once described the global oil market as a giant bathtub. Saudi Arabia dumps its barrels in, then Texas, Nigeria, Canada, Iraq, Brazil, Norway, etc., all sloshing around together. It does not matter whose faucet filled the tub; what matters is how high the water sits. When Iran effectively shut off 20% of the faucets, the level dropped. Every barrel in the tub, including the one pulled out of the ground in West Texas this morning, became more valuable. Traders in Singapore and London bid up the price in real time, and because a barrel is a barrel, American producers got exactly the same (or very similar) price that Saudi producers did. If a refiner in Houston will not pay the going rate, a tanker crew in the Netherlands happily will.
There is a second wrinkle. The U.S. is a net exporter of petroleum products but still a net importer of crude oil itself. America pumps light, sweet crude from the shale patch, while most Gulf Coast refineries were built to digest heavier stuff from Venezuela, Saudi Arabia, and Canada. Retrofitting costs billions and takes years. So we export light and import heavy, both at global prices. And market participants have a name for the phenomenon you have surely noticed (I know I have) at the pump: “rockets and feathers.” When crude spikes, prices rocket up in days. When crude falls, prices drift down like a feather over the course of months.
The Scoreboard
Let me put this in concrete terms. Last Friday, I pulled into the gas station to fill up the family Suburban in anticipation of a weekend with ten, yes ten, soccer games on the schedule. The pump clicked off at $125. Granted, the thing takes premium and has a 28-gallon tank, but still, it’s a shockingly large number to see on the screen. The tough part is that a year ago, the same fill-up was closer to $90.
Now multiply that moment by roughly 150 million U.S. households, and you start to see the scale of the issue. The day before the war began, AAA had the national average at $2.98. By late March, it crossed $4.00 for the first time since 2022, peaking near $4.17 in early April before easing to $4.02 this week on ceasefire hopes, still up roughly 35% in eight weeks. Diesel, which moves your groceries, your Amazon packages, and most inputs to agriculture, has had it worse, climbing nearly 50% to around $5.43. That is why FedEx is charging a 26.5% fuel surcharge, why the Postal Service just added its first-ever surcharge, and why airlines (citing jet fuel up 95%) are rolling out fresh baggage fee hikes.
At times, it still feels as if the dollar figures are ignored, one fill-up at a time. However, researchers at Stanford’s Institute for Economic Policy Research estimate the average U.S. household will spend $740 to $857 more on gasoline this year thanks to the war. For context, the average tax refund this year is up about $350 from last year. The fatter refund check many Americans just celebrated has already been more than clawed back at the pump.
At the state level, the spread is dramatic. Oklahoma drivers are paying about $3.27 a gallon. Kansas, Mississippi, and Texas sit in the low $3s. Meanwhile, five states are at or above $5: Oregon, Washington, Nevada, Hawaii, and the reigning champion of pump-price pain, California. The gap between Oklahoma and California is $2.60 a gallon. And that’s in the same country, dealing with the same war, with the same global bathtub, but a very different bill. If you’ve ever wondered why that is, let’s take a look.
The Self-Inflicted Wound
California is worth pausing on, because almost none of its problems started in the Middle East. The statewide average is around $5.80, and in downtown L.A., it blew past $8 in late March (see the pic).
Even before a single missile flew, Californians were paying roughly $1.50 more per gallon than the rest of the country. The Iran war just sprayed the pump on a bonfire that was already burning. But three forces make California its own worst enemy at the pump.
The first is CARBOB (California Reformulated Gasoline Blendstock for Oxygenate Blending, seriously?), a special gasoline blend required nowhere else in the country. It burns cleaner, but only a handful of refineries can produce it, effectively turning California into a fuel island. When something goes wrong, whether a local refinery fire or a crisis 7,000 miles away, no neighboring state can truck in extra supply. The second is taxes and fees: a 61-cent excise tax, plus about 23-30 cents from cap-and-trade and 14 cents from the Low Carbon Fuel Standard, which tack on more than a dollar per gallon before any market force enters the picture.
The third is disappearing supply. Phillips 66 shut its Los Angeles refinery last October and Valero plans to close its facility by mid-year. Together, those closures eliminated roughly 17% of California’s in-state refining capacity. Both companies cited rising compliance costs, policy uncertainty, and shrinking returns. UC Davis economists estimated the closures alone would add over $1 per gallon by August, independent of anything overseas.
Stack the Iran shock on top, and you get a state that is, in one energy economist’s phrase, “the poster child for the consequences” of this crisis. Some analysts are projecting $8 a gallon (average prices) before year-end if things get worse.
Twenty-One Miles
There is something almost absurd about a 21-mile stretch of water halfway across the world impacting the monthly budget for a family in the United States. It’s even more absurd to think it costs me over $5 to drive 21 miles. But that is the world we live in, where commodities are priced globally, supply chains are interconnected, and “energy independence” is a useful political phrase that quietly depends on a lot of foreign tankers still making their rounds.
No one knows when the Strait returns to normal. Optimistic scenarios have oil flows recovering to 90% of pre-war levels by July, with refined products reaching U.S. pumps a couple of months after. The pessimistic scenarios involve $200 oil and $7 gasoline. Nobody’s crystal ball is particularly clear right now, even if things seem a bit calmer at the moment.
Markets / Economy
- Markets are seemingly pricing in little concern about reescalation between the U.S. and Iran, as indices pushed to all-time highs again. The S&P finished the week up 0.5%, the Nasdaq up 1.5%, and the small-cap Russell 2000 up 0.4%.
- U.S. retail sales rose sharply by 1.7% in March, surpassing market expectations of 1.4% and following an upwardly revised 0.7% increase in February.
- The S&P Global U.S. Manufacturing PMI climbed to 54.0 in April, up from 52.3 in March and surpassing market expectations of 52.5, according to preliminary data. This marks the strongest improvement in factory business conditions since May 2022.
Stocks
- U.S. equities were in positive territory. Technology and Energy were the top performers, while Healthcare and Communication Services lagged. Growth stocks led value stocks, and large caps beat small caps.
- International equities closed lower for the week. Emerging markets fared better than developed markets.
Bonds
- The 10-year Treasury bond yield increased six basis points to 4.31% during the week.
- Global bond markets were in negative territory this week.
- High-yield bonds led the week, followed by government bonds and corporate bonds.
