Last week, the Bureau of Labor Statistics released inflation data for April, and it wasn’t pretty. The Consumer Price Index registered a gain of 3.8% over the previous year compared with 3.3% for the 12 months ending in March. A few days later, the bureau’s wholesale price index came in smoking hot at 6% year over year, more than double what most economists predicted.
While the impact of tariffs lingers, by far the biggest culprit has been taunting motorists in glowing neon lights at every fill-up. Gas prices at the pump are up by nearly 50% since the United States launched its attack on Iran that prompted the longtime U.S. nemesis to effectively halt one-fifth of all global crude oil shipping. The International Energy Agency has called the action the “largest supply disruption in the history of the global oil market,” which has cost American consumers over $40 billion, or $300 per family, in higher energy costs, in addition to $30 billion in direct military expenditures.
It is tempting to assume (hope?) that a quick end to hostilities will trigger a rapid return of oil and gas prices to the status quo antebellum. But even in the somewhat unrealistic scenario of immediate cessation and satisfactory negotiations, energy price disruptions are already working their way through the supply chain and will linger on for months in the form of hotter inflation and higher interest rates. A little office warming gift for new Fed Chair Kevin Warsh.
Around 20% of the global supply of both crude oil and liquefied natural gas travels by tanker through a narrow choke point called the Strait of Hormuz. This constricted waterway, just 22 miles wide at its narrowest point, passes between Iran to the north and Oman on the Arabian Peninsula to the south and serves as the only maritime outlet from the Persian Gulf to the Indian Ocean and the open sea, headed primarily to customers in Asia. China alone accounts for 90% of Iranian crude exports.
Although the U.S. military actions over 37 days of active attacks inflicted major damage, the Iranian regime has remained defiant and retained significant ability to impede maritime traffic with missiles, drones, small attack boats and mines placed in the shipping lanes. Prior to the outbreak of the Iran war, 3,000 ships per month passed through the Strait. In April, just 181 vessels slipped through.