At the eleventh hour, the Pakistani government helped broker a two-week ceasefire in the Iran war.
An interim deal between the US, Israel and Iran was announced on Tuesday minutes before President Donald Trump’s deadline for Iran to reopen the Strait of Hormuz, a key waterway for the world’s oil supply. Earlier on Tuesday, the president threatened to destroy Iran’s “entire civilization” if it did not reopen the strait and allow trade to continue.
The conflict has choked off between 10% and 20% of the world’s oil, sending oil prices soaring around the world. In the weeks since the US and Israel attacked oil-rich Iran, American drivers have faced the highest gas prices on record.
The average price of a gallon of regular gas hit $4.16 on Wednesday, according to AAA’s price tracker, marking a more than 20% increase from last month. Historical price data from the US Energy Information Administration shows that gas prices have reached current levels only once before: when Russia invaded Ukraine in 2022, resulting in an all-time high of $5 per liter, on average.
Analysts hope the ceasefire could lead to an end to the war in Iran – but that doesn’t mean fuel prices will suddenly drop overnight.
“Even if the conflict is over, the energy infrastructure has been destroyed or damaged, and it takes time to repair. So we can still see supply disruptions that happen for weeks and months,” Andrew Lipow, president of the energy consulting firm Lipow Oil Associates, tells Imali.
Why electricity prices ‘rise like a rocket and fall like a feather’
For most of February, gasoline prices hovered around $2.90 a gallon. Within days of the US and Israeli attack on Iran, the national average broke $3 a liter, and about a month later, $4 a liter.
While price increases conflict with drivers, they often follow major supply shocks in oil markets.
“This goes with the old adage that gas prices rise like a rocket and fall like a feather,” said Mark Zandi, an economist at Moody’s Analytics, previously told Money.
For example, when Russia invaded Ukraine in February 2022, the cost of a gallon of gas rose from $3.60 to $4.20 in one month, an increase of about 17%. Prices continued to rise throughout the year until peaking above $5 a liter in June. It wasn’t until November that prices reached pre-war levels again.
In this case, Russia was the aggressor and the biggest seller of oil. Supply disruptions were caused mainly by sanctions and political backlash against Russia. However, fuel prices are going up drastically as a result.
There is a very different version of the phrase “falling like a feather”: recession. During the two major US recessions, the price of gas dropped significantly. Lipow says high oil prices are causing the recession, and that’s one issue if you’d expect gas prices to drop. Despite the recession, he doesn’t expect a gallon of gas to fall below $3 a gallon anytime soon.
Analysts expect fuel prices to remain high due to the destruction of Iran’s oil infrastructure, warning that it will take a long time to restore oil supplies to pre-war levels.
If the ceasefire holds – and if Iran is able to rebuild – that does not guarantee that oil and gas prices will return to where they were. There are new risks to trade in the region that experts say cannot be ignored. The conflict and closure of the strait has introduced “a lot of money at risk” to oil prices which Zandi says will last for months, if not years.
The increased risk could lead to fewer oil tankers willing to carry the burden, and higher insurance costs should it ever occur. That means oil prices are higher for the foreseeable future.
“The market will remember,” said Patrick De Haan, head of petroleum analysis at GasBuddy. “And markets can have a little PTSD.”
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