With the Iran war approaching the six-month mark, Americans are feeling the pain at the pump with the national average price for a gallon of gas north of $4. Oil briefly topped $120 per barrel early in the war and has since retreated to around $90, but is still 30% above the prewar level.
This is hardly surprising, as the Iranian response to the U.S.-Israeli attack was to close the narrow but critical waterway through which 20% of the world’s oil passes. What is surprising is why the price isn’t much higher.
At the outset of the conflict, most oil analysts expected crude prices to shoot up to $150 or even $200 per barrel. After all, one fifth of the global supply was abruptly halted. But the market response, at least so far, has been less dramatic than anticipated for a variety of interesting reasons.
› We’re more energy efficient. Compared with the energy crises of the past, the U.S. is far more efficient at using energy. For one thing, America is much more of a service economy today, which uses less energy than manufacturing or mineral extraction. Our homes and vehicles are stingier today thanks to technological advancements and regulatory standards. The average 1975 model car got 13 miles per gallon; today the average is 28. The amount of oil needed to produce $1 of GDP has declined by nearly 70% since the embargoes of the 1970s and the share of the average household budget devoted to energy expenses has fallen by 60% since 1980.
› Prewar overproduction. Before the attack on Iran, the world was awash in oil. Global production exceeded consumption by 3 to 4 million barrels per day, bulking up inventories and driving prices lower. The American shale revolution is a primary contributor to the surge in supply, as the U.S. became the world’s largest oil producer a decade ago.