I saw J.D. Vance on TV earlier trying to win back some favor with his boss. Vance it’s well known advised Trump against the war with Iran and found himself frozen out of things. Now, he’s singing in tune with the Team Trump Choir – the song being Gas Prices Are High and We’re Sorry But They’ll Back Down Soon.’ There’s just enough reality in all that to mollify regular Americans who support Trump. Like all wars this one will end. When? We don’t know. But also like all wars there will be lasting effects. One of them is that now that Iran has done what it’s never done before which is closing the Strait of Hormuz. The price of oil will be forever affected.
That might seem like a drastic thing to say but I think I can justify it without taking more than a couple of minutes of your time. Much of the daily price per barrel of crude oil comes from what it’s selling for on a given day. However as everyone knows events can cause sudden spikes. Whether from natural disasters or geopolitical events threats to the steady supply of oil causes crude prices to jump. When we’re lucky it’s only for a week or two but often it’s longer. Something else should be mentioned. When there’s a sudden ‘oil shock’, a jump in the price of crude the effects show up right away in fuel prices.
That there a whole bunch of refined gas, diesel, aviation fuel etc. already in the system that was refined at the OLD prices doesn’t stop retailers from jacking up the cost per gallon right away. Yet, when the price of a barrel of crude suddenly drops again from the oil executives down to the retailers they take their sweet-assed time returning to the old prices. Call me crazy but the higher up the chain, the more certain people love it when the price jumps. They will gouge every penny they can by delaying passing along the eventually reduced price of crude as long as they can get away with.
Still, while not on equal timelines the price goes up and then it comes back down. A great amount of effort is made by governments and producers to keep worth oil production and therefore the cost of a barrel of crude more or less stable. Yet even like wars or threats of wars cause prices to jump. As they’ve done with the Iran War. This is where it gets complicated but in a way it’s simple to explain that markets don’t like uncertainty.
For commodities including oil they hedge their bets. Big market traders by “Futures”, a contract guaranteeing a certain amount of something at a specific price no matter what the current daily price said commodity is trading for. Sometimes they come out ahead and sometimes they lose money. However, it mitigates risk and makes it easier to weather shocks.
When it comes to establishing the cost of a contract for oil futures the prospect of the Strait of Hormuz being closed (for whatever reason) at least to large ships like supertankers has been factored in. Still, it has until now always been a case of thinking it terms of ‘we should allow for the worst’ but at the same time not worrying too much. With so many decades of threat and bluster Iran hadn’t until now ever followed through. So, when calculating odds since it had never happened the odds seemed low. Now they’ve gone up and will never again be as low as they had (and for so long) been.
They will never, EVER be seen as low again. Like a person prone to crime and/or violence, once they’ve taken the first step and robbed a person or store, or worse killed another person they are more likely to do it again. That’s self-evident. Even when they get caught and punished if they are free again after doing time they are if anything more likely to commit their crimes. Iran will pay a price with more bombs being dropped on their people and buildings, and of course their military and its infrastructure. The regime won’t care about the people except for leaders who have been or will die. As for buildings, weapons and other military stuff it’s ALL replaceable. They will be able to put a price tag to the cost of rebuilding and prepare to be able to pay it again in the future.
Russia, which thanks to Trump policies is replenishing its coffers will eagerly help Iran rebuild. I for one think Americans will be startled at how quickly they rebuild. Also, they’ve spent decades preparing for more than an airstrike or two against their nuclear program. It’s only now sinking in to certain people that absent all out war from the U.S. with perhaps as many as a million troops time is on THEIR side. The administration assures us we’ve got plenty of missiles and other weapons we can use but the fact is we used up a lot last year in the Red Sea against the Houthis. Now we’ve been firing them off in even greater numbers and the fact is we’re using our supply faster than we can replace what’s being used.
China is watching and will use this to expand their control in the Pacific. Perhaps even decide to scratch an itch of their own and invade Taiwan. There’s not a damned thing we can do about it. At least not until it’s too late. It’s not just about weapons, but our troops and ships which are being ground down. It took almost thirty hours to fully extinguish a fire that started in the launder room of the USS Gerald Ford which has seen it’s deployment extended. IF it comes home in May as we are told it will it will have been at sea for a year – twice the length of a normal deployment. I wrote recently that fire might be an indicator of other, more significant maintenance issues on the Ford and this is something not limited to one of our newest ships. Extra time will be needed to bring the Ford and other ships back up to full capability and THAT means our ability to keep shipping routes open will be compromised.
THAT in turn is something else those who trade in commodity (including oil) futures will have to start factoring in. Still, what matters most is a point of no return has been passed. It feels like Americans and Team Trump in particular are a modern day version of the ill fated Donner Party that didn’t know it had made it through the infamous pass – that gap in the mountains they needed to get through. We all know how that worked out.
So yes, the administration and it’s cheerleaders are speaking partial truth when they say the price of oil will come back down one day. It will. But I’ve already noted that even if the Strait of Hormuz hadn’t been mined it would be well over a month before shipping returned to normal. And even longer to replenish supplies waiting to be refined. In the best of circumstances oil companies and retailers won’t lower prices right away when all this ends. If we’re lucky, very lucky by summer oil transports will be back to normal.
However as I’ve stated the markets will adjust to a new reality in that ‘betting’, hedging against sudden prices spikes with Oil Futures is going to cost more. That price is going to get passed along to the rest of us. Think of it as having car insurance. What happens if you have an accident, or even a speeding ticket? Your rates go up! When you think of Commodity Futures Contracts as being insurance against sudden price fluctuations as I said it’s pretty easy to understand. The bad news? The actual workings of this stuff is complicated as hell and about as clear as mud to most of us. The financial bigwigs WANT it to be so. It allows for mischief, especially when there’s a conservative administration de-regulating everything it can.
The bottom line is that someday the price of oil and the products (from gas/diesel to plastics) produced from it will come down. The the proverbial ‘new normal’ prices for a barrel of crude will be more than what we’d gotten used to. That means a whole lot of stuff will never again be as low as before Trump started this war and Iran reacted by doing what before no one believed they’d ever actually do – closing the Strait of Hormuz.
I’m not an expert in political messaging but I sure as hell hope there are folks on our side who ARE have been crafting a campaign to convert the thoughts I’ve expressed here into a simple set of talking points that can get through to average Americans.
Friends, I know everyone begs you for money. I promise, among all those asking for spare change, we are the smallest and the hardest working. We’re a group of old, disabled people, except for one writer in his mid-50s. The rest of us are in our sixties and seventies, and this is a labor of love. All we’re asking for is the chance to keep telling the truth about Trump and help ensure democracy survives. If you can help, please do. Thank you. Ursula
The other part of the oil equation is how it affects domestic production. The MAIN reason the big oil producers have NOT done more drilling with US borders is how crude oil prices have to be above a certain price per barrel for the oil companies and those who actually do the on-site drilling feel it’s profitable enough to get drilling again. But the domestic production ends up taking months to really get going so it’s not like a one-month spike in prices will lead to more production; it typically takes a consistent three to four months of higher crude prices before the drillers actually start back up.
I dont ever see oil prices coming down much. With all the upheaval, bombings and destruction only oil money is going to be able to pay to fix what american bombs have destroyed. Every energy producing state in the middle east faces an astronomical cost to get back to “normal”. Not to mention beefing up their infrastructure, this will cost billions upon billions. i knew tRump would bankrupt america but i didnt think he could bankrupt half the world.