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Even if shipping through the Strait of Hormuz resumes soon, University of Houston energy economist Ed Hirs says motorists should not expect oil and gasoline prices to fall immediately.
“If peace were to break out, it would probably be eight months before we could see production and throughput from the strait restored and inventories restored, so that we could get back to a prewar equilibrium of a lower price with higher production,” Hirs told Texas Public Radio.
Damage to oil facilities, closed wells and depleted inventories could keep global supplies tight for months—and Hirs predicts oil prices could still rise dramatically before the end of the summer.
The strait is one of the world’s most important energy corridors. The war with Iran and restrictions on shipping have removed millions of barrels of Persian Gulf oil from the global market, contributing to higher crude and gasoline prices.
A reopening would allow tankers to begin moving again, but Hirs said that would be only the first step. He said damage to energy infrastructure and shut-in oil wells across the region could slow any recovery.
“We know that oil facilities in Saudi Arabia, Bahrain, Qatar, Kuwait and Iraq have been damaged by Iran. And we also know that they have shut in tens of thousands of wells in that region. It’s going to take time to restore production to prewar levels,” Hirs said.
For a historical comparison, Hirs also noted that after the pandemic shutdown, “it took…about four years, five years before the rig count in the Middle East fully recovered.”
That means the oil market could remain undersupplied even after the waterway is cleared. Restarting wells, repairing infrastructure and rebuilding commercial petroleum inventories would take time.
Tankers would also have to move through a backlog of delayed shipments before normal supply patterns could resume.
Hirs said emergency releases from the U.S. Strategic Petroleum Reserve and reserves held by other International Energy Agency members have prevented prices from rising even further. But those releases are temporary.
“If peace has not broken out, if the strait is not unblocked and these nations that have been bottled up can’t restore production, we’re going to see much higher prices because of the end of the releases,” he said.
Hirs predicts the greatest price pressure could arrive later this summer as emergency supplies diminish.
“At some point this fall, if not by mid-summer, the price of oil will jump significantly,” Hirs said. He added that oil industry executives have warned prices could exceed $150 a barrel, although such a spike would likely be temporary.
The forecast is uncertain and depends heavily on the duration of the conflict, the condition of Persian Gulf infrastructure and the pace of reserve releases. A durable ceasefire and a faster-than-expected restoration of production could moderate prices. A prolonged disruption could push them considerably higher.
Texas producers are showing signs of some increased activity, including modest growth in drilling permits and additional rigs in the Permian Basin. But the latest production data do not show a major surge in crude output. New wells can take six to eight months to drill, complete and connect to pipelines.
Producers are also reluctant to invest millions of dollars based on a price increase they believe could be temporary. “The large oil companies operate on five- to 15-year time horizons,” Hirs said. “Operating by social media, minute by minute, is not going to get more oil to market.”
The Dallas Federal Reserve says companies are primarily increasing output by completing wells already drilled, improving existing wells and accelerating scheduled projects. Texas refineries and export terminals can respond more quickly, but the state cannot rapidly replace the several million barrels of daily production disrupted around the Persian Gulf.
