Gasoline price rise: Iran war worsened the pain, but the bottleneck began years ago | Read here

Worried that gas prices at the pump will spike again as Middle East hostilities resume? You should be. However, rising crude oil prices alone don't automatically translate into higher gasoline prices at the pump – the equation is not that straightforward.

The bigger concern right now is the "crack spread"—the gap between the cost of crude oil and the gasoline it's refined into. It has now climbed above 2022 levels, when the Russia-Ukraine war and post-pandemic demand pushed oil prices to 14-year highs.

How does the process work?

Refiners take in raw crude oil at the prices mentioned in the headlines and then ‘crack’ it into usable petroleum products. Now, gasoline, diesel and jet fuel have their own trading prices, and the profit that oil refineries make from converting crude into usable fuels is the “crack spread.”

Apart from driving up gasoline prices, the widening crack spread could also weigh on the stock market.

What's driving the fuel crunch if there's no shortage of crude?

The problem began much earlier than the US-Iran conflict; in fact, it began with the Russia-Ukraine war. It significantly damaged global refining capacity, with Russian crude runs falling to a 22-year low of 3.8 million barrels per day in June. It also prompted Russia to ban diesel exports, tightening global fuel supplies by reducing the amount of refined fuel available in the market.

“When 1 in 9 barrels of diesel is produced in Russia, and suddenly they’re banning exports, it’s problematic,” Patrick De Haan, head of petroleum analysis at GasBuddy, told MarketWatch.

Now, the US-Iran war has made the situation even worse.

The International Energy Agency recently said in its July oil-market report that Middle East export refineries have yet to restart. And this has created a complete “disconnect between apparently well-supplied crude-oil markets and tight product markets,” where the raw crude is actually more plentiful than its usable output.

The US national average gasoline price has climbed back above $4 a gallon, its highest level since topping $4.50 a gallon in May. Gasoline futures have jumped 22% from their June low and are now less than 10% below their May 18 peak. By comparison, Brent crude has risen 24% from its recent low but remains 22% below its May 4 high, according to FactSet data.

Even if crude oil supplies increase, gasoline prices may remain elevated as long as global refining capacity stays constrained. That is why keeping the Strait of Hormuz open is critical—not just for moving crude, but also for ensuring refined fuels reach global markets, as per MarketWatch