How Iran conflict could impact carriers this week and beyond

The strait is a narrow body of water running between the Persian Gulf and the open ocean. About 20% of the world’s liquid natural gas and 25% of the world’s oil pass through the strait. Iran has regularly threatened to close the Strait of Hormuz if attacked since at least 2008. In late February this year, for the first time, Iran truly closed off the passage.

The closure is now blocking roughly 15 million barrels per day. Producers in the Middle East are also shutting production because there is nowhere to put the oil.

Distribution is not the only problem; the conflict is also affecting energy production across the Middle East. Qatar halted production of LNG, a drone struck a Saudi Arabian oil company’s refinery, major Israeli gas fields have shut down, and Iraqi Kurdistan halted most of its oil production. The shutdowns are temporary, precautionary measures, but still plenty disruptive.

How bad is it for carriers?

The price spike is a tough blow to many carriers’ available cash and credit lines—but it could also maintain upward pressure on spot rates.

Fuel surcharges may provide some slight relief to contracted hauls later this week. Many weekly fuel surcharges adjust automatically after the Energy Information Administration publishes its weekly average prices. Some carriers may be able to quickly negotiate more accurate/frequent surcharge benchmarks with their customers.

However, the surcharge only covers a portion of rising prices—and only for contract freight. The spot market will be in for a price hike, and private fleets may feel some strain.

“It’s worth remembering that, unlike most contract freight, spot rates don’t include a separate fuel surcharge,” DAT’s Croke said. “Because spot loads are booked close to the pickup date, the rate negotiated between the carrier and freight broker is expected to already reflect current diesel prices. That puts an extra burden on carriers to push for a spot rate that takes fuel prices into account, to control their running costs as much as possible, and to be strategic about where they fill up.”

The diesel price hike could also significantly reduce for-hire capacity, further increasing spot market pricing. As Croke observes, reduced capacity is a key reason that current spot market rates are recovering.

"With fuel accounting for roughly one-third of truck operating costs, some carriers will park their rigs rather than run at a loss. That reduces capacity, and reduced capacity is what’s driving spot market pricing right now,” Croke said. “Carriers that stay in the market will have better pricing power, but they’re going to need it in order to cover higher operating costs.”

Carriers with existing fuel hedging contracts stand to benefit, effectively capping their diesel costs for a time. Carriers that purchased fuel in bulk right before this are probably feeling good this week. But much of the diesel cost will eventually fall on shippers and, later, consumers. In the long run, the oil spike is essentially inflationary for all other operating expenses. If the Iran war continues to disrupt oil distribution, other petroleum producers will increase their prices as well.

Rising fuel prices also tend to weaken consumer and business appetite for spending, reducing overall freight demand. With an already historically weak consumer today, drawn-out fuel price hikes could be even worse for freight demand.

“Rising oil prices hit motor carriers in several ways,” Bob Costello, the American Trucking Associations’ chief economist, said. “There is a direct impact through higher diesel prices, which is the trucking industry’s second largest expense. Most carriers have fuel surcharges in place that allow them to recoup much of those added costs from their customers, though typically not all of them, especially in the short term. There is also an indirect impact on demand. When consumers pay more at the pump to gas up their cars, it leaves less room in their household budgets for other purchases. That means fewer goods that travel by truck, from retail products to building materials, which puts downward pressure on freight demand."

How will diesel stop rising?

The price of diesel is vaguely tied to crude oil futures. While it is hard for diesel prices to go down, stability in oil production and distribution would at least help stop the rise in pump prices.

Global coordination could stabilize prices

The G7 economies are holding an emergency meeting this week to discuss a coordinated effort. The nations expressed readiness to support global energy supply but had not yet agreed to release their strategic crude reserves.

Iran could cease its closure of the strait

Allowing ships to move across the Strait of Hormuz will remove the greatest reason for the rise in crude prices. There are three scenarios for that: Iran could willingly give up its closure while under fire, the attacking countries could cease their hostilities, or the attacking countries could successfully halt Iran’s closure.

The U.S.’s participation in the war likely has a time limit. In one scenario, the massive military superiority of the U.S. and Israel could simply eliminate Iran’s missile capabilities within weeks. Because Congress did not authorize these hostilities, President Donald Trump’s military orders against Iran are also only legally valid for 60-90 days, under the War Powers Resolution of 1973.

However, that time limit is not guaranteed. Regime-change wars in the Middle East have a poor track record, regardless of military superiority. Congress could (though it is very unlikely) formally permit indefinite military action in Iran. The president could otherwise ignore the War Powers Resolution, or simply reframe U.S. involvement to merely support for Israel's own operations. Under these scenarios, the war could be fought “forever.”

Fuel price recovery not so quick

While diesel prices can rise rapidly, their walk down is much slower. Diesel retailers will not simply lower prices if the Iran war ends.

Resuming oil production after the disruptions will also be slow work, as Jim Burkhard, VP and global head of crude oil research at S&P Global Energy, explains. “The first week, the crisis was a transportation issue, which could conceivably be resolved quickly. But it is turning into a producibility concern as well due to storage constraints. Restarting field production of this scale will be a massive technical exercise that could last weeks or more to fully restore output,” he said. “Downstream and other oil infrastructure damage could potentially limit the pace of recovery of oil flows also, including refined products.”