Gas Prices Defying Conventional Wisdom

As the United States rang in the new year, President Donald Trump achieved the unthinkable: Average gas prices were firmly below $3 per gallon. It looked like motorists were poised for an era of little pain at the pump, comparable to the 1990s or the pandemic. Then, a war in Iran was launched, upending global energy markets and wreaking havoc on wallets nationwide as the cost of gasoline topped $4.50. Heading into the Fourth of July? Gas prices are tumbling, and now we wait to see if this trend will persist.

Gas Prices Fall Below $4

The conflict in Iran caused crude oil prices to shoot up like a phoenix. Closing the Strait of Hormuz, the vital Gulf channel that handles about 20% of the world’s oil supply, caused a global energy shock and rekindled the headline inflation flame around the world. Suffice it to say, inflation is now at its highest level in three years.

At its peak, a barrel of Texas tea reached $119 on the New York Mercantile Exchange. Brent, the seaborne global benchmark, also traded firmly above $100 per barrel in overseas markets. Since oil accounts for half of the retail price of gas, fuel prices followed suit, rocketing to their highest level since the Biden administration.

As investors began pricing in a resolution between Washington and Tehran – mainly the reopening of the narrow waterway between Iran and the Arabian Peninsula – oil prices started to plummet. These days, they are trading around their pre-war levels of about $67. What about gas prices?

This has been a fascinating development defying conventional economic wisdom. Amid geopolitical tensions, economists discussed the “rockets-and-feathers” asymmetry in price transmission. When oil surges, gas also soars. When oil plunges, gas prices come down like feathers.

It is not a conspiracy or price gouging but industry fundamentals. Stations adapt to evolving market dynamics when wholesale costs spike, applying immediate pressure on margins since they do not want to sell fuel at a loss. Before cutting gas prices, stations want to exhaust the fuel they purchased at higher costs and protect their margins.

Why is the situation vastly different today? It could be all about politics.

A Trumpian Warning to Gas Stations

It has been said that the worst economic indicators are oil and gas futures. The way crude has behaved has sent mixed messages. One week, the US-Iran conflict is creating the single-worst oil shock since the 1970s. Another week, market rebalancing and even a global surplus are now the base-case scenarios for market observers.

This past spring, President Trump and other senior administration officials estimated that gas prices would return to around $3 a gallon before September. Some, including Energy Secretary Chris Wright, expressed skepticism about pre-war gas prices this summer.

The president then channeled his predecessor's spirit and fired off a warning shot on his social media platform, urging companies to refrain from so-called price gouging. He went so far as to threaten a federal probe if gas prices did not come down at a swift pace.

"The big Oil Companies are not dropping their price at the pump commensurate with the sharply lower prices they are paying for Oil. Those prices are dropping like a rock! In other words, customers are being 'gouged,'" Trump wrote in a June 24 Truth Social post. "I have instructed the DOJ to immediately start looking into this. Gasoline prices better start going down a lot faster than what I’m seeing!"

Remember when former President Joe Biden was lambasted for similar remarks?

While it seems motorists could enjoy some relief during the busy summer driving season, the situation has not been entirely resolved. Global inventories are at multi-decade lows, Persian Gulf production might not return to normal until early next year, and Chinese fuel demand could be revived as the economy appears to be improving.

Defying Tradition

President Trump defied the experts on tariffs and produced little aggregate inflation from his sweeping global trade agenda. Today, the administration is contradicting the norm again, with gas prices. In this case, however, it might not be the invisible hand doing its thing but rather gas stations watching Truth Social and taking action before the government clamps down on their operations.