US gas prices have rocketed higher during the on-again, off-again war with Iran.
After a brief respite, the average price for gas has surged 15 cents in a week to $3.94 a gallon and appears headed north of $4 again. Diesel, which shows up in customers’ shipping costs, topped $5 a gallon again Thursday for the first time in 3 weeks, according to AAA.
It serves as a painful reminder of how the military conflict in the Persian Gulf has a direct effect on your wallet.
But it’s not quite that simple.
Rising fuel prices aren’t just a story about higher oil prices anymore. Gas and diesel prices have taken on a life of their own, divorced from whatever is going on in the Strait of Hormuz and America’s ability to extract concessions from Iran.
In the three weeks that the Strait of Hormuz was at least partially open, oil companies managed to get more than 200 million barrels of crude out of the Persian Gulf, briefly sending oil prices below pre-war levels. Gas and diesel prices fell too – but nowhere close to where they were before the war.
After the Memorandum of Understanding between Iran and the United States collapsed last week, oil prices shot higher, rising above $85 a barrel after hovering in the low $70 range the previous few weeks. That gain is a big deal for gas prices because crude makes up the vast majority of gasoline’s cost.
But oil prices are now up 16% since the start of the war, while gas and diesel have both risen more than 32% – double the oil market’s gains.
That huge imbalance has a little to do with market and trading dynamics – and a lot to do with the particularities of oil refining.
No matter how much oil came out of the strait during the brief moments of relative peace, that crude needed a place to go to make it into something useful. Refineries, which had already made their July plans when the MOU was signed, can’t ramp up or down their capacity with a turn of a dial.
The world’s refinery capacity was greatly diminished during the war: Iran damaged or destroyed 30 Middle Eastern refineries. That prevented a significant recovery after the MOU went into effect. Global refinery output fell by 3 million barrels at the peak of the Strait of Hormuz disruption, and 2.1 million barrels of refining capacity remain offline, according to Natasha Kaneva, chief commodities economist at JPMorgan.
Meanwhile, in a totally different part of the world, refinery capacity has also taken a dramatic hit (literally). Ukraine has damaged so many Russian refineries with drone strikes that the world’s second-biggest exporter of diesel has stopped exporting fuel and has suddenly become a net importer, leading to a global diesel shortage.
The United States has the exact opposite problem: Its refineries have been running at 96% of capacity last month. US refineries processed their largest amount of crude in the second quarter since 2019.
But a record amount of American-produced fuel is heading overseas – in the form of jet fuel (for Europe) and diesel (for Asia and Australia) to help the world bridge the gap in fuel supplies.
That has sent US gasoline inventories to their lowest levels since 2012. At 210 million barrels, inventories are just 20 million above critical levels, according to Andy Lipow, president of Lipow Oil Associates. Inventories are just over 30 million barrels above the lows reached during Hurricane Katrina, where stations across the United States ran out of gas.
The share of US fuel for the American market is now falling while gas demand for summer travel is on the rise and diesel demand is about to peak as US farmers begin the fall harvest. Low supply and high demand are a recipe for high prices.
That has sent crack spreads – the profit margin US refineries make – to a record high. Gasoline crack spreads at US refineries are up 60% from a year ago and diesel and jet fuel crack spreads are more than double their 2025 levels, according to the US Energy Information Administration.
But this summer’s extreme heat could pose an even bigger problem: Refineries need cool temperatures to operate efficiently. They need to boil the oil into its various constituents and cool it down to create gasoline, diesel, jet fuel and other products. If temperatures are too high, refineries struggle to do their job – and they can’t make as much gas.
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