If the Strait of Hormuz is open, why are gas and diesel so expensive?

By Matt Egan, CNN

New York (CNN) — The Strait of Hormuz is no longer paralyzed and yet fuel prices remain painfully high. It’s a vexing problem with profound financial, political and economic consequences.

Gasoline prices, averaging $4.36 a gallon nationally, have never been this high at this time of year, according to AAA data.

Even after a series of emergency steps from US states and Europe, diesel is only about 20 cents away from the all-time high set just last month.

In short, what started as an oil supply crunch caused by the Iran war has morphed into a broader energy crisis being felt by drivers, truckers and farmers around the world.

Unblocking the Strait of Hormuz has been helpful, but it’s still incredibly dangerous – and thus expensive. Not only that, but Russian refineries are getting destroyed by Ukrainian drones, and Houthi attacks in the Red Sea have disrupted a vital shipping lane.

“The wars have not been resolved. There is no peace. The energy system is still constricted,” said Jan Stuart, global energy strategist at Piper Sandler.

‘Insane’ cost of oil supertankers

The security challenges have been underscored by the staggering cost of getting crude oil out of the Middle East.

Last year, the daily cost of hiring an oil supertanker (known as a Very Large Crude Carrier, or VLCC) to sail from the Persian Gulf to China was just $65,000, according to Clarksons, a London-based research firm.

By the time the Iran war was about to begin, that cost had climbed to $230,000 per day.

Now? It costs $1.6 million per day to hire a VLCC for that route, according to Clarksons.

“That’s insane,” said Tom Kloza, chief energy adviser at Gulf Oil. “If you own a tanker, you’re in great shape – as long as it goes unscathed by the war.”

But some tankers are not emerging unscathed.

Multiple commercial vessels reported getting struck by projectiles in the Strait of Hormuz in recent days alone, including at least two crude oil tankers, according to the United Kingdom’s Maritime Trade Operations.

Insurance, sailor costs surge

But it’s not just the cost of hiring a tanker.

It’s the cost of persuading sailors to go on dangerous voyages in war zones.

Some shippers are offering sailors up to $25,000 per trip – an amount that could represent more than a year of wages, according to The Wall Street Journal.

Insurance costs have also skyrocketed, reflecting the risk of sailing through the region with valuable cargo.

Oil producers are now paying between $30 million and $40 million for a roundtrip voyage in and out of the Strait of Hormuz, the Journal reported.

Real-world vs. financial price

All of this – the cost to hire a tanker, exorbitant payments to sailors and surging insurance rates – is making it more expensive for consumers and businesses around the world.

It used to cost just $2 per barrel to get crude out of the Persian Gulf. Now, that cost has spiraled to about $33, according to Kloza.

“We’re getting a reasonable amount of crude out, but that’s misleading because the cost of that crude exiting is incredible,” he said.

This helps explain the wide gap between the price of crude in financial markets and the price in the real world.

Consider that the price of Dated Brent – the real-world cost of receiving immediate physical barrels of crude – is $135.74 a barrel as of Thursday, according to S&P Global Platts. That’s well above the Brent futures price of about $100 and not far from the all-time high set in April.

And it’s that real-world price that trickles down to what consumers are paying at the gas station.

“The United States does not live in isolation. We live with a global price because we import gasoline,” said Stuart.

Refineries are getting blown up

The global energy system is not experiencing a single war, but two or arguably three wars – simultaneously.

On top of the US-Iran war, a conflict that has stretched for much longer than many imagined when it started, there is the battle between Yemen and Iran-backed Houthi rebels.

Houthi drone and missile attacks have disrupted another vital chokepoint for global trade, the Bab al-Mandeb Strait.

And then there are the increasingly successful Ukrainian drone attacks destroying refineries in Russia, one of the world’s leading exporters of diesel.

Facing fuel shortages at home, Russia has responded by limiting its fuel exports. China, seeking to avoid shortages of its own, has similarly restricted its exports.

US refineries are the only ones left standing. But they are already producing as much gasoline, diesel and jet fuel as they can. Now, some US refineries are dialing back their production for routine maintenance that typically occurs at this time of the year.

Hurricane Isaias could make matters worse if the storm knocks production offline or damages refineries along the US Gulf Coast.

Buffers have vanished

Energy prices would be much, much higher if not for the fact that the world had a sizable rainy day fund built up when the year started.

Commercial and emergency stockpiles act as shock absorbers during crises.

But now those inventories have been aggressively drawn down, leaving the world with less margin for error now. Those shrinking stockpiles have driven up the premium built into current prices.

“We are running on very, very low inventories. We don’t have buffers anymore,” said Stuart.

All of this explains why prices remain high and the risks are elevated – even as the flow of oil out of the Strait of Hormuz has recovered towards pre-war levels.

“You have to end all three wars – or even two out of three wouldn’t be bad,” said Kloza.

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