‘The good old days are gone’: how will US prices stand as war in Iran surges on?

As consumers watch the price of gasoline and airline tickets rise, experts say that the war in Iran will continue to drive up prices across the economy.

“The good old days are gone,” said Christopher Tang, a professor at the UCLA Anderson School of Management who studies global supply chain management. “Right now we see the gasoline prices going up, but that is only part of the story. Everything will be more expensive.”

The price of oil has risen steadily since the war began at the end of February, with crude oil prices surging past $110 per barrel this week. Fuel prices have risen in part because Iran controls access to the strait of Hormuz, a narrow passageway between the Persian Gulf and the Gulf of Oman where about 20% of the world’s oil travels through.

In his address on Wednesday, Donald Trump said that “America has plenty of gas,” and assured the country that the United States was not dependent on oil shipments through the strait.

“We’re now totally independent of the Middle East, and yet we are there to help. We don’t have to be there. We don’t need their oil,” he said.

But the president’s statements ignore that oil is an internationally traded commodity, said Samantha Gross, the director of the energy and security initiative at Brookings Institute. And while it is true that the United States is a top oil and gas producer in the world it still relies on imports from other countries.

“We’re going to pay the same high prices that the global market is paying,” said Gross.

With Iran either blocking oil shipments through the strait of Hormuz or charging a hefty toll of up to $2m, that forces tankers to either take longer routes or pay up, raising logistics costs either way.

The world’s largest retailer is already feeling the squeeze. On Thursday, Amazon said it would add a 3.5% surcharge for third-party sellers that will go into effect later this month. Shipping companies including UPS and FedEx have raised rates and added fuel surcharges of more than 25%. The US Postal Service is adding an 8% surcharge, which will take effect on 27 April.

“We have steadfastly avoided surcharges and this charge is less than one-third of what our competitors charge for fuel alone,” USPS said in a press release.

For the last few weeks, countries have been able to dip into their strategic oil reserves but prices will also be pushed up as supplies need to be replenished, said David Bieri, an economist who teaches at Virginia Tech’s School of Public and International Affairs.

“What we’re seeing now is as these inventories have been depleted, they will need to be filled up again with actually high-priced oil,” Bieri said.

In that sense, he added, we’re only at the beginning of seeing higher prices. Oil is not only important to gasoline and jet fuel but also a critical part of the chemical production process for products such as pharmaceuticals and fertilizers. That affects the cost of necessary supplies including prescription drugs and groceries.

Diesel prices are going up along with oil, which is used as a fertilizer on farms, and is one of the main expenses. That makes both the cost of growing crops and raising livestock more expensive, said Christopher Wolf, a professor of agricultural economics at Cornell University.

While it can take some time for those shocks to trickle down to grocery stores, some may decide to push up prices immediately.

“A lot of the retailers and processors have a rational expectations approach, which is, if we can see it coming, we’ll start adjusting prices up so that it isn’t a big shock all at once,” said Wolf.

Last week, the Independent Grocers Alliance said in a statement that a 10-15% rise in fuel prices could in turn raise food prices by 2-4%. While the alliance acknowledged the impact of rising logistics costs on food prices in the short term, the brunt of the effects are anticipated by mid-summer.

Trump said this week that he expected the United States to leave Iran in two to three weeks but did not offer more details in his address on Wednesday night. Even a swift end to the war won’t necessarily correct the higher prices, experts agreed.

The strait of Hormuz has long been considered a potential vulnerability in the global oil market supply chain. Now that Iran has shown its willingness to exert control over the passageway, it raises the cost of doing business independently from a potential end date to the conflict.

“The political risk premium on the pricing of oil will be with us for some time because you never know when this could flare up again,” said Ravi Ramamurti, a professor of international business strategy at Northeastern University. “This will be a persisting effect.”

Tang, the UCLA professor, put it more simply: “When the prices go up, they rarely come back down.”