- The blockage in the Suez Canal, a critical passageway for Middle Eastern oil, stands to boost US gas prices further.
- A commercial tanker ran aground in the canal, blocking dozens of ships from crossing the channel.
- Harsh winter storms in Texas and commodity-price inflation have already driven gas prices higher.
- See more stories on Insider’s business page.
Add a crippling logistics nightmare to the list of factors sending gas prices higher. You could say it was ever a given.
On Tuesday morning, the container ship Ever Given ran aground at the Suez Canal and formed a traffic jam in one of the world’s most critical trade routes. About 600,000 barrels of crude oil pass through it daily from the Middle East to the US and Europe, according to Braemar ACM Shipbroking data cited by Bloomberg. Another 850,000 barrels are shipped through the canal to Asia on a daily basis.
The recovery from the coronavirus pandemic was almost certain to lift oil prices anyway, but this sudden shock stands to make them climb higher. The world’s most-traded commodity plummeted at the start of the health crisis and traded at historically low levels for months as demand failed to rebound, then started to bounce back in November and stabilized at pre-pandemic highs with economies on the verge of reopening.
Already, Brent crude, oil’s international standard, surged as much as 4% on Wednesday on the back of the traffic jam.
Dozens of ships have lined up around the blockage, and a Wednesday statement from Ever Given’s shipping company said “no progress has been made” in excavating the 400-meter vessel.
The longer the blockage lasts, the more severely it stands to disrupt oil markets. The problem for the American consumer is that a harsh winter storm and President Joe Biden’s new stimulus have already been putting upward pressure on US gas prices in early 2021.
Alternative oil sources might rush to fill the gap, but the Suez Canal traffic jam is choking off supply just as demand recovers.
Deep freezes and an economy running hot
In general this year, the inflation projected to come from the expected economic recovery is directly impacting commodity prices. Energy is likely to experience a much larger price jump than other industries, Jefferies analysts said in a February note. The sector already saw a 23.6% increase in CPI last year, handily outpacing broader inflation gauges. Increased purchase and use of cars during the pandemic likely contributed to stronger gas demand and the price boost.
Those hoping for inflation to cool in the spring are sure to be disappointed. The $1.9 trillion stimulus package passed by Democrats earlier in March is expected to further stoke consumer demand and lift spending just as the economy reopens. New Federal Reserve projections published last week see inflation rising to 2.4% by the end of the year before steadily trending above 2% for some time.
Some on Wall Street expect prices to grow even faster over the next quarter. Higher prices for healthcare and staples will lift inflation to 2.6% in April and May before it settles at 2.3% at the end of the year, Morgan Stanley economists said in a March note.
Separately, harsh winter weather in Texas crippled the domestic oil market and lifted prices throughout February, halting one-fifth of US oil-refining capacity last month. At a time when major oil producers were already cutting production to support prices, the winter storms further slammed supply and sent prices soaring.
Where the national average price of gasoline fell below $2 per gallon at the start of the pandemic, the Texas freeze boosted prices above $2.50, according to NPR. The average rose further still in March and now sits at $2.87 per gallon, per AAA data.
The scope of the canal’s traffic jam can also have reverberating effects throughout the oil market. Broader measures of the US manufacturing sector cite supply shortages as the key constraint in meeting burgeoning consumer demand. Alleviating the blockage still leaves many more ships waiting to cross the channel than usual, which could then overwhelm ports around the world.
Since crude oil is used in everything from vehicle gasoline to plastic production, a more intense shortage could slam both the energy industry and the manufacturing sector as a whole.
“It’s a kind of a witches’ brew of market conditions that led to extreme tightness,” Jeremy Pafford, head of North America at market information service ICIS, told the Financial Times. “This is going to take a long time to unwind.”
Adding up this brutal combination of factors — reopening, stronger inflationary trends, the Texas freeze, and now a supply logjam — paints a picture of higher gas prices into the spring. It may be time to call it a given.
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