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Trump-Iran Negotiations and Hormuz — Why Gas Prices Haven’t Risen

Trump-Iran Negotiations and Hormuz
Trump-Iran Negotiations and Hormuz

The sea route through which one-fifth of the world’s crude oil passes has been blocked since last month.

Yet last week, the nationwide average price of gasoline at gas stations fell by 3.4 won per liter.

Both the blockage and the price decline are facts. What lies between them?

3-line summary
1. Trump is negotiating over the Strait of Hormuz, which Iran has blocked.
2. Three weeks into the blockade, gasoline has fallen by 3.4 won.
3. The ability to hold out comes from oil reserves and diversified import sources.

How far things have progressed

On July 12 (local time), Iran’s Islamic Revolutionary Guard Corps declared a full blockade of the Strait of Hormuz. It cited the claim that “the security of the strait is threatened by illegal intervention by foreign powers,” and said the blockade would remain in place “until further notice, until U.S. intervention in the region ends.”

On the night of August 4, more than 3 weeks later, U.S. President Trump told reporters that negotiations were making rapid progress and that “we will know the result within the next 48 hours.” In an interview with Fox News, he said the strait would “reopen very soon.”

Iran’s account has a different tone. According to a report by Hankook Ilbo, Iran acknowledged that talks mediated by Oman were nearing their final stage, but maintained that the strait would “never return to its previous state.” It avoided giving a definitive answer on the issue of imposing transit fees.

The remaining issue, in other words, is not whether it will reopen, but under what conditions it will reopen.

Why this strait matters

Hormuz is narrow, and there is effectively no alternative route. Crude oil and liquefied natural gas from Saudi Arabia, Iraq, Kuwait, and Qatar all leave through this route.

According to a report by Munhwa Ilbo, about 20% of global seaborne crude oil shipments pass through here, and 80% of the crude oil that passes through heads to Asia. This is not about a route from the Middle East to Europe being blocked; it is about the route coming our way being blocked.

As recently as March of this year, about 70% of Korea’s crude oil imports came from the Middle East.

It is not only oil that is affected. According to the same report, 20.4% of the liquefied natural gas used by Korea comes from the Middle East. This is more complicated than crude oil. Transporting gas in liquid form requires specialized vessels and dedicated terminals, and such facilities are not available everywhere. Power generation and city gas are tied to this.

The import map has changed in the meantime

This is where the figures diverge.

On May 26, the Ministry of Trade, Industry and Energy said the Middle East’s share of imports in this year’s 5~7월 (May–July) intake volume was provisionally tallied at 48.5%. It was 69.1% during the same period last year. This was the first time crude oil imported from outside the Middle East exceeded half of the total.

The places that filled the gap were as follows:

  • Americas 23.1% → 35.6%
  • Africa 2.2% → 8.3%
  • Asia 5.0% → 7.4%

Each type of crude oil has different components, so refining facilities must be operated accordingly. This is why changing import sources is not as simple as changing suppliers. That work progressed by this extent in half a year.

The card the government pulled out for the first time in 30 years

There is also a mechanism in place on prices.

Since March 13, the government has been implementing a petroleum maximum price system. It sets a cap on the supply price at which refiners sell to gas stations. Under the seventh standard announced on June 26, the cap was cut by 150 won per liter, to 1,784 won for gasoline, 1,773 won for diesel, and 1,380 won for kerosene.

There is an easily confusing point here. These amounts are not the prices we pay at gas stations. They are the upper limit when products move from refiners to gas stations, and gas stations sell them after adding their own margin and taxes. That is why, despite the 1,784-won cap, the nationwide average retail price last week was 1,869 won.

The system resets its standard every 4 weeks. As the government has said it will operate the system flexibly according to Middle East conditions and international oil prices, the direction of the next round will also depend on whether the strait reopens.

So what are the numbers now?

From July 26 to August 1, the nationwide average price of gasoline at gas stations was 1,869 won per liter, down 3.4 won from the previous week. Diesel was 1,852.8 won, down 4.1 won. Dubai crude stood at $81.91 per barrel as of July 30.

When concerns over a blockade first rose in early March, domestic reserves stood at 221.2 days’ worth. The government’s share was 117.1 days, and the private sector’s share was 104.1 days. In addition, the Ministry of Trade, Industry and Energy applied for 3,100만 barrels through petroleum-product swaps, contracted for 2,000만 barrels, and released 1,500만 barrels to the market.

The government has not yet used the option of directly releasing its strategic oil reserves. Its position is that it will proceed cautiously as supply and demand remain smooth. This also means it has measures in reserve.

What to watch

What I am watching closely is transit fees.

Whether the strait reopens receives major news coverage. But even if it reopens, if passing ships are charged a fee, that cost will be added to freight rates and ultimately reach gasoline prices and the prices of goods. That is why news of its reopening is not the end of the story.

What is holding down domestic prices now is not the strait, but import sources, reserves, and the price cap. All three are mechanisms that buy time, not mechanisms that eliminate it.

When and in which direction the next maximum-price standard is released, and whether the Middle East share remains below 50% after August. These two are more accurate signals than news headlines.

Sources