The Impact of U.S.-Iran Negotiations on Global Oil Prices
U.S. President Donald Trump has made bold claims that if negotiations with Iran conclude and the Strait of Hormuz is reopened, international oil prices will drop significantly, leading to stable gasoline prices in the United States. While there have been instances where news of progress in U.S.-Iran talks has led to a gradual decline in oil prices, experts suggest that the situation is more complex than it appears.
The price of West Texas Intermediate (WTI), a key benchmark for U.S. oil, was $67 per barrel on February 27 of last year, the day before the U.S. and Israel launched an attack on Iran. Following the outbreak of hostilities, the price surged past $110 per barrel and has since dropped to around $88. Despite this decline, analysts believe it will take considerable time for prices to return to their pre-war levels. Several challenges are preventing a quick recovery.
Five Key Challenges in Restoring Oil Supply
If the U.S. and Iran agree to open the Strait of Hormuz during a 60-day ceasefire, it could be a significant step toward resolving the crisis. However, the opening of the strait does not automatically mean smooth oil supply or a return to previous crude oil price levels. Experts highlight five major obstacles that are hindering normalization:
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Difficulty in Releasing Trapped Tankers
Over 1,500 tankers are currently trapped inside the Strait of Hormuz. Even if the shipping lanes are opened, Iran’s Revolutionary Guard is likely to impose various procedures that could delay the process. This would further prolong the time it takes for countries worldwide to receive their oil supplies. -
Damage to Energy Infrastructure
Assessing the damage to energy infrastructure and developing repair plans will take significant time. The Wolf Research Institute predicts that reconstructing Middle Eastern oil facilities and restoring inventory levels to their previous scale will continue until next year. Some forecasts suggest full recovery could take several years. -
New Mine Installations by Iran
The U.S. Secretary of State Marco Rubio has warned that military clashes between the U.S. and Iran could prolong the time needed to reach a negotiated settlement. These clashes involve U.S. military strikes against Iranian vessels installing new mines in the strait. For civilian oil tankers, this means additional obstacles are still being placed in the Strait of Hormuz. -
Uncertainty About Iran’s Stance
The risk of Iran changing its position remains a factor influencing international oil prices. Investors believe Iran could re-blockade the strait at any time, demanding passage fees. This uncertainty is reflected in higher oil prices, which remain above pre-crisis levels. -
Uncertainty About the Strait’s Opening
President Trump has repeatedly claimed that negotiations will soon conclude, only to later backtrack, stating that more time is needed. Even if a 60-day ceasefire is agreed upon, there is a possibility that the strait could be re-blockaded once the period ends. As a result, it is difficult to expect oil prices to plummet as quickly as Trump has predicted.
Future Outlook for Oil Prices
U.S. gasoline prices are expected to reach $4.80 per gallon (3.8L) this summer, marking a 50% increase compared to pre-U.S.-Iran war levels. This surge has worsened inflation, reduced real wages for workers, and contributed to a decline in President Trump’s approval rating ahead of the midterm elections in November.
In response, the White House has begun efforts to ease public concerns. Kevin Hassett, the director of the White House National Economic Council, stated in an interview with CNBC on May 26 that if U.S.-Iran negotiations are concluded, oil will fill refineries worldwide within 1-2 months, leading to a rapid drop in energy prices.
However, expert forecasts differ. Capital Economics, an investment research institute, argues that even if navigation through the Strait of Hormuz resumes, energy prices will not immediately return to previous levels. They anticipate limited growth in the oil industry’s stock prices.
Trump’s Dilemma in Stabilizing Oil Prices
President Trump has implemented several policies aimed at stabilizing oil prices. These include releasing strategic petroleum reserves, allowing foreign vessels to operate within U.S. waters for oil transport, easing sanctions on Russian and Venezuelan crude oil exports, and temporarily exempting fuel taxes.
Despite these measures, they have proven ineffective. Some members of Congress are now urging Trump to reduce or completely ban U.S. oil exports. While controlling oil exports could temporarily lower domestic prices, it risks destabilizing the entire energy market. Reduced export volumes could force refiners to cut operations, while global oil prices could skyrocket, severely impacting the world economy.
Another proposed solution is increasing domestic oil production. However, expanding production facilities and boosting supply in a short period is not feasible. Previous U.S. presidents would typically call on Saudi Arabia to request increased oil supply. As the leader of OPEC and the only nation capable of rapidly increasing production, Saudi Arabia plays a crucial role. However, due to the blockade of the Strait of Hormuz, Saudi oil exports are significantly hindered, making this approach less effective.
Given these challenges, CNN reported that the only viable method for President Trump to lower oil prices is to resume navigation through the Strait of Hormuz. If negotiations with Iran stall, discussions are underway about resuming hostilities for 4-6 weeks to forcibly reopen the strait. However, renewed conflict would likely cause further damage to Middle Eastern energy facilities, potentially driving oil prices higher. President Trump is caught in a difficult position, where pressuring Iran through additional conflict is also challenging.
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