Why Hasn’t the Iran War Driven Oil Prices Even Higher?
Supply and demand likely play an important role, but so do market expectations.
When Iran closed the Strait of Hormuz in early March 2026, the media carried some
pretty scary predictions of what would happen to crude oil prices. But even after more than two months without tankers transiting the Strait, the benchmark price of crude oil peaked in April at a month-average around $120 per barrel – well below the $150-$200 that many pundits were predicting – before declining steeply starting a couple weeks ago as outlines of a longer run ceasefire took shape.
The highest monthly price in 2026 is more than 40% below the all-time inflation-adjusted price, which occurred in 2008. This was even though the 2026 disruption has been called the
largest energy crisis in history by the International Energy Agency. In the last month, news articles
have been everywhere asking why oil prices weren’t much higher.
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Source) Monthly average front-month futures price. (June 2026 data through 6/19/26)
That’s an important question as tensions between the US and Iran continue, and closing the Strait is seen as one of Iran’s most effective weapons. Is disrupting this 24-mile-wide transit link a less potent weapon
than previously thought, despite the fact that 15-20 million barrels per day of the world’s 100 million barrel daily oil consumption passed through it – as crude oil or refined product – prior to the war? Or was a higher spike averted by luck and other factors that are unlikely to be repeatable?
The argument that closing the Strait never had much potential for driving prices to the $150-$200 range rests on economic analysis about demand, supply, and inventories. With the primary oil benchmark (Brent Crude) price around $70 before the war, it would have meant a more than doubling of the price to reach those levels. Wouldn’t such an extreme rise reduce demand, increase supply, and raise incentives to pull crude out of storage? The answer is surely yes, but by how much?
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Though there’s an expansive literature on oil markets, there isn’t much agreement on how price sensitive the demand is. The large range of estimates is partly because it’s difficult to measure how much a change in the oil price alters consumer behavior when so many other energy and related prices are changing. And partially because movements in oil prices alter the entire macro economy, which feeds back on the demand for oil.
The typical range of estimates (a price elasticity somewhere between -0.05 and -0.15) implies that a doubling of oil prices could reduce the quantity demanded by as little as 3% or as much as 10%. The higher number would mean that “demand destruction” alone would offset most of the lost supply from closing the Strait at a price below $150. But even the low end of this range would be a substantial change in the supply/demand balance when combined with other factors.
One of the most important other factors is crude oil and refined product inventories. These numbers are even squishier,
particularly from China, but the world likely went into the war with somewhere between
7 billion and 10 billion barrels of crude and refined product inventory. This includes private stocks, strategic reserves of governments, and quantities in pipelines and on the approximately 8000 tankers that carry petroleum products on waterways. Not all of this can be tapped quickly, but even if only 5 billion barrels are available, that would be enough to cover the shortfall for about a year. So inventories have also undoubtedly played an important role in tempering crude prices.
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Short-run production responses are limited, because existing oil wells have
relatively little output flexibility and drilling new wells takes time. Still, over the course of months, not weeks, new crude supplies can come online and reduce the rate of inventory depletion. There has also been a different form of supply elasticity that has been tapped more quickly. Since early in the war,
oil pipelineshave been used to move crude out of the middle east that had been scheduled to be shipped through the Strait of Hormuz, possibly as much as 4 million barrels per day.
None of these factors in the physical supply and demand for oil likely could entirely offset the shipping disruption due to the war. But each could play a significant role, and it’s possible that in combination they have compensated for much of the supply that was lost, thus limiting the price spike. Certainly, no one knew going into the war how big a role each factor could play. Even today, after more than three months of conflict, it isn’t clear how significant each response has been.
