Reopening of the Strait of Hormuz: Impact on Prices

The reopening of the Strait of Hormuz is good news for the American economy and consumers. It raises the obvious question: when will the price at the pump return to normal, and what will happen to overall prices? While it is difficult to make precise predictions, here are three things we are watching:

1. Spot Prices vs Future Prices on Crude Oil

The price of a barrel of oil most often quoted in the news is for a futures contract. It is a prediction of where oil prices are going in the future. The spot price is the price paid for the physical delivery of a barrel of oil today.

We know that it will take some period of time for oil supplies to return to normal—the Strait has to be safely reopened to transit, the logjam of ships has to be cleared, oil has to be loaded, shipped, etc.

We also know that there has been growing concern about the level of inventories of crude and associated petroleum products heading into the peak of the summer.

With tight inventories and slowly returning supply, the price refiners pay for a barrel of crude will likely not fall as quickly as future prices. As a result, the price consumers pay for a gallon of gasoline may remain elevated or even increase in the short-term.

Also potentially impacting the near-term price is global demand. Notably, China reduced its oil imports by nearly 3 million barrels a day over recent months. This drop in demand helped keep prices from rising further. If global demand returns more quickly than global supply, that will put upward pressure on price.

2. Energy is Just One Source of Overall Upward Price Pressure

Inflation has remained stubbornly above the 2% target for over five years. While falling energy prices will relieve some pressure on overall prices, energy is one source of elevated inflation. In the most recent month, prices excluding food and energy were 2.9% year over year.

Key commodities flowing through the Strait of Hormuz have led to increases in global prices for aluminum, helium, and sulfur—key inputs for the construction, technology and agriculture sectors, putting upward pressure on finished products.

Businesses have been slowly passing through the cost of increased tariffs in their prices. For example, apparel prices were up 4.8% year on year in May, footwear up 5.2%. Both products are heavily imported and thus impacted by tariffs and increased shipping costs.

Beef prices are being impacted by a shortage of cattle. The identification of the screwworm in American cattle could mean that it will take longer to rebuild herds.

3. Watching for Long Tails

Businesses have had to make a variety of decisions in response to effects of the closure of the Strait of Hormuz. Some of these decisions could have long tails.

Recent reports from the U.S. Department of Agriculture indicate that farmers have responded to high fertilizer prices by moving away from planting wheat and corn to soybeans, a less fertilizer-intensive crop. Wheat plantings point to a record low. It remains to be seen what this means for future supplies and prices.

Conclusion

We know prices will decline; it is just a question of how quickly. In the meantime, Americans are in a much better position than most other parts of the world. Because we are net energy producers, we have physical access to more supplies, which has helped energy prices not increase as much as other regions. But at the end of the day oil and fuel are global commodities and we can’t fully insulate ourselves from market volatility.

About the author

Neil Bradley

Neil Bradley is executive vice president, chief policy officer, and head of strategic advocacy at the U.S. Chamber of Commerce. He has spent two decades working directly with congressional committee chairpersons and other high-ranking policymakers to achieve solutions.

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