It’s a common question I hear from clients: “If the U.S. is producing record amounts of its own oil, why does a conflict thousands of miles away in the Middle East make it more expensive to fill up my SUV in suburbs?” It feels like a disconnect, but the answer lies in the fact that oil isn’t just a local resource—it’s a global currency. Even if not a single drop of oil from the Strait of Hormuz ever reaches a U.S. refinery, the closure of that vital waterway sends a shockwave through the global market that changes the price of every barrel on earth, including the ones produced right here in the U.S.
Why U.S. Oil Prices Are Rising
West Texas Intermediate (WTI) is the U.S. benchmark for oil. While it is produced domestically, its price is heavily influenced by global supply and demand.
- Global Competition for Barrels: When 20% of the world’s oil supply is cut off at the Strait of Hormuz, countries that previously relied on Middle Eastern oil (like those in Asia and Europe) must find it elsewhere. They begin bidding on any available barrel, including those produced in the U.S., which drives up the price for everyone.
- Market Interconnectivity: Traders look for the highest price globally. If global benchmarks like Brent crude spike, U.S. producers will sell to international buyers unless domestic prices rise to match.
Why U.S. Gas Prices Are Increasing
Retail gasoline prices respond to the replacement cost of fuel, not just the current supply.
- Refining Realities: Although the U.S. produces more oil than it consumes, our refineries are often configured to process heavy crude imported from abroad rather than the “light sweet” crude produced in Texas. Disruptions in global shipping force refiners to pay more for suitable crude, a cost passed to the pump. Why our refineries aren’t configured to process U.S. oil is a whole other discussion.
- Anticipating Future Costs: Gas station owners set prices based on what it will cost to buy their next shipment. If they see wholesale oil prices skyrocketing due to the Strait’s closure, they raise prices immediately to ensure they have enough cash to restock their tanks at the new, higher rate.
- “Rockets and Feathers”: Economists note that gas prices typically rise quickly (like a rocket) when oil prices spike but fall slowly (like a feather) even after tensions ease, as retailers are cautious about lowering prices until they are sure their replacement costs have stabilized.
Ultimately, while we have achieved a high level of energy independence on paper, we are still tied to a global price tag. When 20% of the world’s oil supply is suddenly at risk, the “neighborhood” of global energy becomes a lot more expensive for everyone. Understanding this helps us look past the daily headlines and focus on the broader economic reality: in a connected world, a bottleneck in the Middle East is felt at every gas station in America.
Please comment or send an email if you have any questions.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
