DETROIT – A countdown looms as the global fuel economy awaits to see if a critical oil trade will reopen in time of President Donald Trump demand.
The U.S. leader gave Iran a deadline of 8 p.m. eastern time to reopen the Strait of Hormuz, a closure that is threatening wallets, businesses and the broader economy.
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The passage way, which is considered the world’s most critical energy chokepoint, has been shut for roughly five weeks, driving fuel prices higher and putting global supply chains under severe strain.
‘Taking a toll’
Robert Jackson of Detroit didn’t mince words about what higher gas prices are doing to his wallet.
“Rough. It’s taking a toll on me,” he said.
Janice Marshall of Dearborn said her family has made a simple calculation.
“If we don’t have to go, we are not going,” she said. “That’s just wasting gas.”
Michigan gas prices, which at one point surged by roughly a dollar per gallon, have seen modest declines in recent days. AAA reports the statewide average is now $3.87 per gallon.
Trucking companies feel the squeeze
At Northfield Trucking Company, a regional carrier operating roughly 140 trucks out of a 90,000-square-foot facility, the fuel crisis is hitting daily operations hard — especially with diesel prices above $5 a gallon.
President and owner Leigh Ann Frederick said she held off as long as she could before raising her rates.
“I initially thought this would be very short. And we’re going into multiple weeks at this point. So about at the three-week mark, I called our customers and said, hey, listen, we’ve waited as long as we could. We’ve digested all of it we can. We’re going to have to really start looking at rates in our fuel surcharge programs and so forth,” she said.
Frederick said her company is doing everything it can to manage costs before passing them along to customers.
“We are working on trying to optimize routing, reduce idle time, really pay attention to fuel efficiency and fuel mileage,” she said.
But the fuel surcharge process puts companies like hers perpetually behind the curve, Frederick explained.
“We get a national report that is posted every Tuesday and from there our fuel surcharge base changes and it becomes available at that point to our customer. And so, we’ll always be in a lag, especially when the fuel prices are just spiking up day after day,” she said.
The owner said the strain isn’t limited to smaller carriers.
“We’re always a week to two behind on trying to do that. So financially, it’s a strain on our industry, especially for the small trucker. We’re not very large in size comparatively. We’re about 140 trucks strong. But even for trucking companies that have 1,000 trucks, they’re absolutely seeing the strain,” she said.
She said the industry’s notoriously thin margins make it impossible for trucking companies to absorb the added costs indefinitely.
“The problem is with the margins, the way that the trucking company industry just runs and operates, we cannot digest those expenses,” Frederick said. “I just know that for a trucking company to sustain, it cannot be on them.”
Frederick said industry economists she’s consulted have painted a sobering outlook.
“They’ve said that they thought it was [going to] last seven to eight months, so I’ve kind of prepared for that,” she said.
A two-to-three week window
Jason Miller, a professor of supply chain management at Michigan State University, said the U.S. has been partially shielded so far, but that buffer is running out fast.
The reason the full impact hasn’t hit yet comes down to oil that was already in transit when the strait closed, he explained.
“We’ve had oil on the water, that’s why we de-sanctioned the Russian oil, we de-sanctioned the Iranian oil. And so, because of that amount of product on the water, the broader impacts really haven’t been fully felt yet,” he said.
But Miller said that window is closing quickly.
“So, I’d say right now the key thing is that this crisis will progress very rapidly if the situation with Hormuz is not resolved within two or three weeks,” he said. “It’s just important for everybody to keep in mind, we have never seen a global energy shock of this magnitude. This far outpaces anything we have seen.”
Ripple effects around the world
The closure isn’t just a U.S. problem. Miller said the effects are already reverberating across Asia and could accelerate in Europe within days.
“What we are seeing is substantial shortages of refined petroleum products in South Asia, so Bangladesh and Oceania in terms of Australia. And we’re also starting to see broader impacts in terms of petrochemical production in South Korea and Japan,” he said. “Which will eventually come over to cascade and affect the U.S. because that means less plastic parts that we’re importing and putting in machinery and motor vehicles and things of that sort.”
He said Europe faces a more immediate threat.
“In Europe as well, we’ll be looking at much more serious impacts within a week or two than what they’ve currently experienced, heavily due to their reliance on natural gas that comes from the Middle East that has been completely bottled up,” Miller said.
The knock-on effects, he explained, could ripple through American manufacturing in ways consumers might not immediately recognize.
“Japanese plastic parts makers can’t get enough plastic. So they dial down production. That now means the U.S. importer bringing those plastic components in to put in their product can’t get enough. And so they run out of inventory. They may have to stop production or shift to producing something else that doesn’t need those components,” he said.
The price of oil — and what’s at stake
Miller said a prolonged closure could drive prices far higher.
“If we don’t start to see more flow through in terms of Hormuz, or if say the Houthis would become engaged and shut off Saudi exports through the port of Yanbu through the Red Sea, you would be looking at $140, $150 a barrel oil within a week or two — with sort of the rule of thumb that we could go as high as $180 to $200 a barrel if this continues for another month or two,” he said.
That would shatter historical records. The previous peak for Brent crude — the global benchmark — was approximately $147 per barrel in July 2008.
“$150 would be an all-time high,” Miller said. “If you’d adjust for broader price changes, you’d still have to go a little bit higher than that though.”
Recession risk
Perhaps most concerning, Miller said, is that American consumers are less equipped to handle an energy shock now than they were in previous crises.
“All the evidence in terms of credit card delinquency rates, auto loan delinquency rates, et cetera, points to the U.S. consumer not being at a very strong position right now to absorb an energy shock versus back in early 2022 when there was still a lot of stimulus savings left over and additional government support,” he said.
If oil prices reach $140 or $150 per barrel, Miller said, the conversation changes entirely.
“Is this the thing that finally starts to cause some type of significant drawdown in consumer spending that could precipitate a recession. We’re not there yet, but if oil gets to the $140 or $150 a barrel, which is gonna drive gasoline prices to $6 plus a gallon — that’s where we’re at a different conversation,” Miller said.
He said the math on a prolonged closure is stark.
“The reality is, is we need to take global energy consumption down by roughly 10 percent. For perspective, at the bottom of the COVID pandemic, when the entire world was locked down, we only reduced demand by about 20 percent. So, we would have to go halfway to that point in terms of essentially demand being destroyed. That is for sure a global recession,” Miller said.