The U.S. blockade of Iranian ports continues, and a couple of very large crude carriers, or VLCCs, each capable of carrying about two million barrels of oil, transited the Strait of Hormuz early in the week of April 12, but traffic that week was still 90% below traffic on February 27. Iran had threatened to halt all trade in the region, even outside the strait, due to the U.S. blockade, but did not act upon that threat. It threatened to prevent “any exports or imports to continue in the Persian Gulf, the Sea of Oman, and the Red Sea.” A ceasefire between Israel and Lebanon changed the situation, with Iran indicating that the strait will be completely open during the ceasefire, dropping oil prices in the $80 range per barrel for both West Texas Intermediate and Brent. The next day, however, Iran’s military reclosed the strait due to the U.S. blockade of Iranian ports.
According to Politico, Treasury Secretary Scott Bessent is optimistic that gasoline prices will fall to about $3 per gallon between June 20 and September 20, contingent on progress in the U.S.-Iran peace negotiations. Bessent claims that Middle East producers could restore output within one week once the Strait of Hormuz reopens. On April 20, AAA reported that the national average price of regular gasoline was $4.04 a gallon. The Treasury Department and the White House plan to closely track retail fuel prices and could call out stations that fail to pass along lower crude oil costs.
Bessent also confirmed that waivers for Russian and Iranian oil purchases would not be renewed when they expire this month. The United States allowed sales of Russian and Iranian oil that was being shipped prior to March 11, which have now been sold. The Iranian waiver, which the Treasury Department issued on March 20, allowed about 140 million barrels of oil to reach global markets; that waiver expired on April 19. The decision is part of an effort to put economic pressure on Iran to restart negotiations to end the war, the “financial equivalent” of a bombing campaign. A U.S. blockade could cost the Iranian economy $13 billion a month by one estimate.
Bessent said that the United States could also impose secondary sanctions on countries that purchase Iranian oil. According to The Epoch Times, the Treasury Department sent letters to financial institutions in China, Hong Kong, Oman, and the United Arab Emirates, threatening secondary sanctions if they were found to be doing business with the Iranian regime.
Politico reports that Trump administration officials are urging leaders of U.S. oil and gas companies to increase drilling to add supply and thereby lower fuel prices. The administration has been asking the oil industry to produce more, but producers have so far ignored the plea due to oil price volatility, worried that prices will not be sustained high enough for long enough to make the investment worthwhile. Energy Secretary Chris Wright and Interior Secretary Doug Burgum have been in “constant communication” with oil and gas executives throughout President Trump’s second term to encourage companies to produce more as part of President Trump’s energy dominance program.
According to the Wall Street Journal, U.S. defense officials have held talks with the heads of General Motors (GM), Ford, and other American manufacturers about producing weapons and other military supplies as the wars in Ukraine and with Iran are depleting the Pentagon’s stocks, reminiscent of a practice used during World War II. Detroit’s automakers halted car production during World War II to produce bombers, aircraft engines, and trucks. During President Trump’s first term, he asked GM and Ford to team up with medical device makers to produce tens of thousands of ventilators in the early days of the COVID-19 pandemic.
Even before the Iran war, defense officials were asking these companies if they could rapidly shift to defense work to backstop traditional defense companies as a matter of national security. GE Aerospace and the vehicle and machinery maker Oshkosh were involved in the talks. Most of Oshkosh’s business ($10.5 billion in revenue) is in nondefense work, but the company also builds tactical troop carriers for the Army and U.S. allies. GM has a defense subsidiary that makes a lightweight infantry squad vehicle based on the Chevrolet Colorado pickup, which accounts for only a fraction of the automaker’s revenue and total production capacity. GM could be a leading contender to build a larger infantry squad vehicle for the U.S. Army that would replace the Humvee.
The defense officials also asked executives to identify barriers to taking on additional defense work, from contracting requirements to issues in the bidding process. The Pentagon’s recent request for a $1.5 trillion budget — the department’s largest in modern history — calls for major investment in munitions and drone manufacturing. That budget includes $1.1 trillion for the Defense Department for the next fiscal year, and $350 billion for critical munitions, an effort to expand the defense industrial base, and other matters.
Analysis
With the Iran War ceasefire set to end, the Trump administration is optimistic about the chances for a long-term peace deal, which it predicts will soon lead to lower oil prices. Even though Secretary Bessent claims that the Middle East could ramp up production within one week of the Strait of Hormuz reopening, there will still be a lasting impact from the conflict on the region’s energy infrastructure. Fatih Birol, executive director of the International Energy Agency, claims that Middle East producers may need up to two years to restore their oil and gas output to prewar levels, and Fraser McKay of Wood Mackenzie notes that it will take countries like Iraq as long as six to nine months to reach prior production levels. A lasting peace deal would be welcome news to world energy markets, but oil prices will remain elevated due to damage to several production and refining facilities.
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