Gas Prices Climb Again as Iran Conflict Squeezes Supply

What happened

US gasoline futures climbed toward $3.10 a gallon this week as traders weighed renewed hostilities between the United States and Iran against hopes that pump prices might soon ease. The increase comes as AAA data shows August on pace to be among the most expensive months at the pump on record, with prices nearing $4 a gallon nationally heading into the Labor Day weekend.

President Trump met with US oil refiners this week to discuss short-term measures for boosting refining capacity, which industry data shows is already running near its practical limits. The meeting came as gasoline inventories fell for a second consecutive week, leaving supplies below their five-year seasonal average.

Why it matters

Higher gas prices land directly on household budgets at a politically sensitive moment, with midterm elections just two months away and inflation remaining a top concern for voters. Diesel prices, which affect the cost of shipping and, by extension, groceries and other everyday goods, have also risen sharply since fighting with Iran escalated.

Analysts at Goldman Sachs have flagged growing tightness in global refining capacity as a bigger driver of pump prices than crude oil costs alone, meaning even a resolution to the Iran conflict may not immediately bring relief at the pump.

Evidence and context

Geopolitical tensions have taken nearly 10 percent of global refinery capacity offline, according to market data, with Russian refining runs near multi-year lows amid the ongoing war in Ukraine and renewed US-Iran strikes keeping tanker operators cautious about transiting the Strait of Hormuz, a critical corridor for seaborne oil.

The price increases follow a period of volatility over the summer, when West Texas Intermediate crude briefly dropped more than 6 percent on signals that the Strait of Hormuz might reopen more fully to shipping, before renewed fighting reversed some of that optimism.

Likely peaked.

— the US energy secretary, in an earlier assessment of gas prices

The people and places affected

Drivers across the country are feeling the pinch heading into one of the busiest travel weekends of the year, with AAA projecting heavy demand over Labor Day even as prices climb. Some states, including California, have seen prices run well above the national average.

Retailers with fuel operations, including large chains, have reported record gas station sales volumes even as price sensitivity grows among consumers, according to recent earnings commentary from major retailers.

The open questions

It remains unclear whether the administration's push with refiners this week will produce any near-term relief, given that US refining capacity is already operating close to its ceiling and cannot easily expand output on short notice.

The bigger uncertainty is how prices respond if fighting near the Strait of Hormuz escalates further, a scenario that could tighten global oil flows well beyond what's already reflected in current prices.

What comes next

The Energy Information Administration's next weekly inventory report will offer an early read on whether the recent supply declines are stabilizing or continuing to worsen going into the fall driving season.

Markets will also be watching for any developments out of the Strait of Hormuz standoff, along with follow-through from this week's meeting between the administration and refining executives, for signs of whether prices at the pump might finally level off.