Gasoline prices have eased in June, with the U.S. average price dropping by 4% to $4.15 on June 10.
Keep in mind, though, that the national average price is more than 40% higher than before the attack on Iran. The recent drop is small comfort for households after gas peaked at $4.50 in early May.
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Traditionally, gasoline prices tend to peak in the weeks running up to July 4. This year, that is not happening and the latest decline in prices is providing a modicum of relief to commuters during the first two weeks of June.
This is an unusual season, though, with the on-again-off-again ceasefire in the Mideast affecting prices.
In addition, while seasonal factors are likely to maintain the demand for gasoline during the summer months, the worldwide supply remains under pressure with the closing of the Strait of Hormuz.
We expect inventories of crude oil and other petroleum products to continue to be drawn down as long as the strait remains closed and then even after it is reopened as damages to infrastructure are repaired and inventories replenished.
Should the war continue, we see the strain on supply coming to a head in September and October.
Echoes of past crises
This is not the first time that a war has sent energy prices higher.
Most recently, in 2022, Russia’s invasion of Ukraine caused disruptions to the energy supply chain, sending gasoline prices 60% higher.
Going back half a century, the initial oil embargo of 1973 sent prices soaring, and it took roughly a year for those increases to recede.
Then in 1979, a second oil embargo sent gasoline prices higher again. It took another year for prices to stabilize.
After the 1970s embargoes, price stability was achieved because it was in OPEC’s best interest to maintain enough supply to meet demand.
Petrodollar earnings were invested in U.S. securities, enabling the nations of the Gulf Cooperation Council to both increase their wealth and to invest in its diversification.
As the market stabilized, all parties benefited.
The takeaway
In each of the last three energy crises—the two oil embargoes in the 1970s and the 2022 Ukraine war—gasoline prices rose quickly, with price increases peaking roughly a year after the initial shock.
The overall U.S. inflation rate closely follows increases in gasoline prices, with the increased cost of transportation becoming a tax on all households but inflicting the most harm on lower-income and middle-class households.
In the May CPI data, gasoline increased by 7% on a monthly basis and by 40.5% on the year. Considering the widespread importance of energy costs, expect those increases to show up in the inflation rate later this year.
