Iran Ceasefire: What Trump’s Deal Means for Gas Prices

For months, America has been at war with Iran slowly suffocating the global economy.

In March, Iran closed the Strait of Hormuz – the narrow waterway that connects the Persian Gulf’s oil reserves to global markets. As a result, energy prices gradually rose while stock markets and growth forecasts fell. Analysts have begun to warn that, if the Straits do not reopen soon, the world economy could sliding into a deep recession.

And then, on Tuesday night, these storm clouds dispersed: The US and Iran reached a agreement on a ceasefire, one that would ostensibly halt U.S. attacks on the Islamic Republic in exchange for summary transit in the Straits.

Oil prices fell rapidly by as much as 20 percentwhile the Dow jumped more than 1000 points.

And yet some fear that Wall Street’s mood has brightened faster than geopolitical reality. Israel continued to attack Iranian proxies Wednesday in Lebanon, in violation of the ceasefire agreement. Iran, meanwhile, held the Street closedaccuse the US of violate the terms of their understanding, and declared negotiations with America “unreasonable”.

To get a clearer picture of what this all means, I spoke with oil market expert Rory Johnston on Wednesday. Author of the popular newsletter, commodity context, Johnston has long argued that investors are underpricing the risks of the US-Iran conflict.

We talked about why time might be on Iran’s side in a war of attrition, what a postwar global economy might look like, and how American consumers would fare in the most optimistic — and pessimistic — scenarios. Our conversation has been edited for clarity and brevity.

Now that there has been a ceasefire – sort of – what do you think is the most likely scenario for this war, the Strait of Hormuz and oil markets going forward?

I think we have taken a step in the right direction. But there are many unsolved questions. As of Wednesday afternoon, there did not appear to be any summation of flow through the Straits. And in fact, we have seen many, many, many explosions and attacks continue during the ceasefire.

My core assumption about this crisis has always been that (President Donald) Trump was the actor most likely to say hello — he’s the one most sensitive to external market pressures. Given that, the most likely course of the war was that Trump would eventually unilaterally de-escalate. And Iran would retain quasi-control over the Strait of Hormuz.

And that seems to be the situation we’re heading towards, which – while problematic – is far better than the doomsday scenario.

But Iran has stressed that it allows only a limited number of ships through the Strait and that the waterway will remain under the control of Iran’s Revolutionary Guard Corps. We had accounts last night that Iran would only allow 10 to 15 ships through a day. If true, it wouldn’t be much of a change from the status quo.

But would it be temporary? If the fire stops leading to a current peace deal — which allows Iran to collect tolls on ships in the Strait — wouldn’t Tehran want a lot of traffic moving through that waterway?

Yes. If the US Navy withdrew – and the bombing stopped and Iran felt safe and secure – then it would have an interest in summarizing a moderate level of flow.

The issue is: Trump said, “Let’s negotiate. And while you’re negotiating, let’s just do a favor and reopen the Strait, so the world economy doesn’t collapse as we speak.” But this is basically asking Iran to forfeit its main source of leverage. Iran has its foot on the aorta of the global hydrocarbon market. It probably won’t go away before ensure a more durable agreement.

So the question is: Can the negotiations that begin on Friday lead to such an agreement? And I think that’s the trillion-dollar question right now.

Let’s say we do get a peace deal, in relatively short order. In the most realistic version of that scenario, what can Americans expect to experience economically? What happens to the prices of petrol, travel and other energy-related commodities?

If it lasts, we’re going to avoid the scenario where America’s average gallon of gas costs $6. But even if everything goes perfectly from here, the world will still be operating with about half a billion barrels of oil less than it would have had it not been for this war.

And that’s because the Gulf states had to oil production declines — since without the Straits they had no way to transport or store all that crude oil.

Right. And even if flows resume through the Straits today, it’s going to take weeks to months for them to get that production back to pre-war levels.

What would this mean for products downstream of fossil fuels – jet fuel, plastics, semiconductors, etc.? Will it take longer for the prices of those things to normalize?

Yes. For one thing, there haven’t been many confirmed attacks against oil fields or oil processing facilities in the Gulf. But there was asset refining attacks and petrochemical facilities. So productive capacity is down.

At the beginning of the year, a barrel of diesel was $30 more than a barrel of crude oil. Right now it’s almost $70 more. But that’s down from a high watermark at the end of March of around $90 a barrel. Thus, the prices of both crude and products have fallen. But markets for the latter remain very tight. And they are likely to remain tighter relative to crude oil going forward.

Let’s talk about the more pessimistic scenario. At this point, what is the most plausible, worst-case outcome? What are you worried about?

The most obvious answer is that come Friday, no one can agree, and then we’ll be back in the same place we were before the fire stopped.

Of course, we now know that there is some appetite in the White House for a deal. We can see that they are responding to market pressure. But Iran can see it too.

From Tehran’s strategic point of view, they have an interest in dragging it out.

So, let’s say that Iran decides that time is on their side and feels no rush to withdraw most audacious claims. If the Strait remains effectively closed for another two months, what would that mean for American consumers?

By that point, I think we’ll see things like $200 a barrel of crude oil. And that’s assuming there is no escalation in tit-for-tat attacks on Gulf energy infrastructure.

But if we just continue pre-ceasefire conditions until June, we will be in a situation where prices will have to rise until they force demand destruction.

In other words, prices will have to be so high that consumers have no choice but to use less energy.

Right. Let’s say we have a shortfall of 10 million barrels per day in the market. There is no way supply can respond fast enough to fill that hole. So, in order to keep the global oil market from basically cannibalizing itself – and running inventories down to zero – you’d have to raise prices until people just stop consuming.

In Western countries this will manifest as extremely high prices. But people will manage. In the developing world and the global south, this will manifest as outright shortages. Eventually you will need a big drop in consumption. If it doesn’t happen in the West, it will happen in poor countries.

And the same will happen with diesel and jet fuel.

How much would America’s status as an energy exporter protect us in that scenario? After all, high oil prices are good for oil producers. So from America trade terms will improve: The things we export will become more valuable, relative to the things we import. And oil-rich regions of the country are expected to benefit.

Separately, we are less dependent on the Gulf’s energy supplies than Europe or Asia. So, can those factors save us if this truce falls apart?

The United States—and North America, more generally—remains the most energy-secure area in the world. We probably won’t see shortages here, although we will feel the price pressure.

So yes, it will benefit America’s terms of trade in a way. But the spillover effects will be extreme. For example, you may see a surge in Texas and New Mexico. But it will hit consumers across the United States. And it will hit them much harder on the coast because you have more trade exposure there than mid-continent.

More fundamentally, at the end of the day, if prices continue to spiral upward, and we have deficits throughout the global South, it’s a world of deep, deep recession. Much of the planet is likely to be in an economic depression.

No matter how energy secure the United States is, it is still part of a global economy. And it will eventually feel the economic effects of that economy turning off in all sorts of ways. This will not be good for the median voter in any way. It will feel like a massive tax increase. Markets would tumble. The world would simply be forced to consume less than it did before this war began.