Addressing business leaders this week, President Donald Trump argued that the economy was “roaring.” He added that gasoline prices, which are at four-year highs, will be “going down very substantially.”
The average cost of a gallon of gasoline is around $4.50. That is a 50% increase from just a year ago. High gasoline prices are a major reason why approval ratings for the president and Republican members of Congress are weak. The United States is a nation of drivers, and demand for gasoline is relatively inflexible. People have to drive to work and to get groceries, regardless of cost.
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Trump is probably correct that gas prices will fall over the next few months. The Strait of Hormuz will likely reopen fully, and the global economy will once again be well supplied with oil. Both the U.S. and Iran face enormous pressure to end the war and restore normal shipping flows. Trump and the Republican Party understand that the conflict is unpopular and that Americans are frustrated by high gasoline prices. Meanwhile, Iran’s economy has deteriorated sharply, with hyperinflation taking hold. Its major economic partner, China, is also pressuring Tehran to reopen the strait.
Historically, when West Texas Intermediate crude, the domestic benchmark, trades between $100 and $110 per barrel, retail gasoline prices typically range from $4.00 to $4.50 per gallon. Prices sit at the top of that range, reflecting war-related uncertainty, the start of the summer driving season, and low inventories.
The pricing structure of gasoline helps explain this dynamic. A barrel of oil contains 42 gallons, so at $105 WTI, the raw material cost is about $2.60 per gallon. Roughly 60% of the retail price reflects crude oil. Refining and distribution add about $1 per gallon, while federal, state, and local taxes contribute another 57 cents. By this rough calculation, gasoline prices should be closer to $4.25 per gallon rather than $4.50.
Given the pressure on both sides of the conflict, oil prices should begin to drift lower. However, refinery constraints, driven in part by environmental regulations, and depleted inventories will slow the decline in gasoline prices.
Within a few weeks, WTI could fall toward $90 per barrel, with gasoline prices gradually moving toward $3.75 per gallon. If crude declines further to around $80 per barrel by the fourth quarter, prices at the pump could approach $3.25 by year-end.
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The president is directionally correct: Gasoline prices are likely to fall. But he would be wise to temper expectations. The decline will be gradual, not dramatic.
Voters will welcome any relief, but they are unlikely to see it overnight.
James Rogan is a former U.S. foreign service officer who later worked in law and finance for over 30 years. Now he writes a daily note on markets, economics, politics, and social issues.
