Where Are Oil Prices Heading?

Hey, What's News listeners. It's Sunday, September 20th. I'm Luke Vargas for The Wall Street Journal, and this is What's News Sunday, the show where we tackle the big questions about the biggest stories in the news. This week, our global fossil fuel supply chains breaking down, with Iran continuing to exert control over the Strait of Hormuz, Iran-backed Houthis capturing another maritime chokepoint near Yemen, and a key Saudi oil pipeline shut following drone attacks. Middle Eastern energy supplies haven't looked this precarious in decades. We're breaking down what that means for consumers, the global economy, and the midterms. Let's get right to it. Well, we've got a stacked show today. Later on, we'll head to Houston and New York to hear from journal reporters Benoit Morin and Conrad Puzier. But first, I'm joined in our London studio by Andy Critchfield. The head of energy news for Dow Jones Energy. Andy, when you and I spoke following the attack on Saudi Arabia's East-West pipeline, you were pretty unequivocal in saying the entire security environment around energy has been flipped on its head here, and what we pretended could be made safe clearly cannot be made safe at present. Do you still feel that way? Just how impaired are global energy flows now? Absolutely. The world's changed. And when we look at what's changed it, it's the nature of warfare, drones, the nature of surveillance in many respects. Because if you go back to, say, the 1980s, when you had the tanker war in the Gulf, and arguably the risks against energy were more profound then, the thing that we didn't have then obviously was drones, but also you didn't have the ability to track real-time tankers, oil on the water, to pinpoint with remarkable accuracy exactly where things were that you needed to attack. What you were wanting to do, right? And now what's changed is, you know, you can be a pretty agrarian force in Yemen, as the Houthis are, equipped with some rudimentary drone technology, a bit of help from the Iranians, obviously the Houthis are a proxy, and you can, you know, effectively shut down one of the world's most critical shipping channels, the Bab al-Mandeb Strait, normally handles about three and a half million barrels a day of crude. And not only that, you can strike deep into Saudi Arabia, which is what they appear to have done with the, this attack on the pumping station in the east-west pipeline. And, you know, how do you protect against that? So China, especially, China's probably the most exposed of all the major economies, world's second largest economy, huge producer of manufactured goods, huge consumer of commodities in general, and very much dependent on that link with the Middle East. And what this has exposed is that, okay, China buys all the Middle Eastern oil, but it doesn't protect it, right? It's not Chinese naval vessels putting their lives on the line to protect the shipping, it's the US. And that's the paradox. And I think the Chinese now are wanting to change that. And in fact, actually, 2026, this will be the first year where we've actually seen Chinese transport fuel demand drop. And that's since 2001, when they joined WTO. And we saw the start of the boom in the Chinese economy. So you're seeing now in China, you know, an exponential increase in uptake of electric vehicles, the electrification of transport, far in excess of what most analysts thought. And that's important because road transport still accounts for about a third of global crude demand. And the question is, is this the peak of global oil demand that we're seeing now? We'll speak to Benoit Morin about how the US is responding. They're pushed to sort of recenter energy flows to the Western Hemisphere in response to all of this. But another question, as it relates to the US, the journal has reported that, appeals by the crown prince of Saudi Arabia to President Trump, encouraging Washington to join the fight against the Houthis have gone unanswered. Trump has instead said the U.S. would basically do everything but attack the Houthis. Do you see it likely that the U.S. remains on the sidelines here, given how severe some of these energy market disruptions are? Might we reach a point where countries in the region, if the U.S. does stay on the sidelines, decide to sort of step in on their own and try and reassert control? Well, they've done it before. 2019, when the Abqaiq oil facility in Saudi Arabia's eastern province was hit, and that at the time was described as the Achilles heel of the global oil industry, and it shocked the markets. In fact, on the day that Abqaiq was attacked, it was the biggest intraday movement in physical oil markets historically that we'd ever seen. But actually, by the end of the day, markets had closed pretty much where they started. And the Saudis at that time, went to the U.S. government, can you come and help us? You have this thing, the Carter Doctrine, the implicit guarantee that you will protect energy infrastructure and energy flows out of the Middle East. And the U.S. said no. And, you know, that triggered quite a dramatic response in Riyadh in terms of the relationship with the U.S. and also, you know, the status of this agreement, unwritten, guaranteed energy security out of the region since the 1970s. And, you know, the U.S. is stretched at the moment. This conflict has exposed, has exposed vulnerabilities of conventional militaries like the U.S. and their ability to take on nations like Iran. And yet, I saw a report from analysts at Citi this week saying they're forecasting Q4 will see the Strait of Hormuz reopen, quote, supported by regional diplomacy. Color, you skeptical? Well, it's like kind of putting a target on the wall, right? I think they say about oil price forecasting, never give an oil price forecast with a date. And that seems like they've broken that rule there. You know, I've been in an oil report, oil journalist now for 26, 27 years. And for much of that time, I heard people say the Strait of Hormuz, it's, you know, this is a red herring. There's no danger. The U.S. will always protect it. Look what happened. I have been speaking to Andy Critchlow, the head of energy news for Dow Jones Energy. Andy, thank you so much. Thank you. We've got to take a short break. But when we come back, U.S. gasoline prices are up over a dollar a gallon from a year ago. But without an end to the Iran war, is there any reason to think prices will be pulling back anytime soon? And what about before the midterms? Stick around. Well, let's widen the conversation now and bring in a pair of terrific journal colleagues who've been looking at what rising oil and gas prices mean for the U.S. economy, as well as for voters in this midterm year. Benoit Morin covers the oil and gas industry for us out of Houston, and economics reporter Conrad Puzier is in New York. Conrad, let me start with you. You've been on really the dollars and cents of rising energy prices lately. For most people, individuals and families, that means tracking regular gasoline prices. But I know a number of your stories lately have also contained a graph showing diesel prices, which have been rising even faster than gasoline. What has been jumping out to you on both those pricing fronts? Yeah, I mean, gas and diesel prices have shot through the roof. Heating oil is up like crazy. Airfares, which obviously depend on kerosene prices, are up. So energy costs are up. And I think it's a good thing that we're really going up for people. And that's the big inflation story this year, right? And survey after survey, people say that they're really concerned about rising prices. And this year, at least, a lot of that is driven by energy. Inflation's been hovering around 3.5%. If it wasn't for the war, it'd probably be around 2.5%, economists estimate. So that's a pretty big difference. Now, the interesting thing is that rising prices have been really concentrated in these very few categories, gas, diesel, airfare, heating oil, which means it's had a really targeted impact on some people and not on others. So for example, I live in New York City, I take the subway to work. If I fly somewhere for a story, the journal pays for the plane ticket. So I've basically felt almost nothing of this whole impact. But then again, if you drive to work, if you drive your kids to soccer practice, if you have a big car, it's been a huge pain for you. And the same goes for regions, right? There are some states like Wyoming that are very agricultural where definitely no one takes the subway to work, right? That are really feeling this a lot more than other places. And so I think it's a really big impact. And I think it's a really big impact and so what you have is this big overall inflation impact that really only tells half the story because for some it's a disaster and for others, it basically doesn't matter. I'm glad you brought up airfares. This is an interesting one where you don't see demand destruction, right? This is one of those categories where you've reported, you know, people have these larger travel budgets, their stock portfolios are higher, so they're willing to eat these costs, but that doesn't make the inflation go away. Yeah, I mean, that's the interesting thing about inflation, right? Are people willing to pay more? Are companies actually able to pass costs on? And it's a really interesting thing. I mean, I think it's a really interesting airfare is the perfect example where, yes, the costs have gone up for airlines because they have to pay more for fuel. But at the same time, there's all this demand for travel, right? Like consumers are in a pretty good place financially. Wages are still sort of rising. Stock markets are up. People feel wealthy. And so that demand is the other half of this that explains why this is causing inflation. Now, what we haven't seen so far is this really filtering through into core inflation, right? Which is the thing that the Fed is always the most concerned about. So so far, this is mostly an energy inflation story. What we haven't seen is like big spikes in food prices or prices in packaging or other goods and services that are kind of tied to energy. And that's great news for the Fed, because that's always the big worry. As long as it's only an energy inflation story and nothing else, you can plausibly tell yourself that this will be a one off, that this is not going to cause an inflation spiral. But once it starts seeping over into all of this, we're going to have to wait and see what happens. But we haven't seen that, which is great. Ben, while I'm curious what you're hearing from energy executives, are they, so to speak, just making hay while the sun is shining here? And while prices per barrel are as expensive as they are, or are they getting a bit Yeah, there's definitely this duality that they are making a lot of money. And so that's definitely been good to their bottom line. But that being said, that's something that they've been really concerned about because higher oil prices have a tendency to slow the economy down. So you don't want that to linger on for too long. And I would say that we're way past the in-case-of-emergency-break-glass moment that was really back in March, maybe, when those oil and gas CEOs were saying publicly and telling the administration that if the Strait of Hormuz did not reopen, then you would be stuck with a pretty dire fuel situation. So Mike Wirth, the CEO of Chevron, used some strong language about it at a recent conference in Texas. He said, you know, those are mechanisms that help to mitigate the prices. and supply risk have largely played out. And so really in layman's terms, that's we're running out of options, right? Countries have drawn from their fuel stocks. You cannot tap strategic oil reserves much further. So prices can only go up from now, right? There's nothing to cap them anymore. And other CEOs echo this view and they're saying essentially, we're going to have to go through this phase of higher prices. There's no way around it. In terms of what President Trump can do to address the situation, we're just 40 days out from the midterms, Benoit. People are voting already in some states. This is crunch time. Should we expect to see anything here to bring prices down? Trump has very limited options right now. One measure that the oil and gas industry is absolutely desperate to avoid is a ban on diesel exports. And the administration has repeatedly shut down the idea over the past few months. But in recent weeks, they've said that all options are on the table to lower prices while also keeping on rejecting this idea. The idea is that you would limit how much diesel refiners in the U.S. can send abroad. In theory, this would beef up supplies domestically and then lower prices for Americans. But there could be really bad unintended consequences if refiners cannot sell their product abroad. They might just make less of it overall, right? And then prices in the U.S. would end up, going up. And then this would impact the reliability of the U.S. as a partner to its allies. So the industry really wants to avoid that. And short of that, one other solution would be to get China to export more diesel because it's reduced exports in recent months. But that would probably only help on the margins. So really, it seems like Republicans will just have to sell to American voters that this is the price they have to pay for achieving whatever goals they set. So I think that's a really good question. I think that's a really good question. Conrad, are there any other ways we could see governments, the U.S. or others, respond to rising energy prices now or in the coming weeks? There are. I mean, Benoit mentioned the plausible things the U.S. government can sort of do. If you want to go more radical, there are two options that governments have, but they're both bad. So the first one is price caps. Legally, very complicated, but Richard Nixon did it in the 1970s, so there's some precedent. You basically ban the sale of gas for over $40 or something. The issue with that is that it doesn't fix the problem, which is the supply shortage, and it doesn't change people's behavior. So when there's not enough gasoline, you want people to adjust their behavior, right? Like if you live somewhere where you have the choice between taking the subway to work and driving, and usually you drive because it's more complicated, you want that person to now take the subway because gas is expensive so that the limited gas can go to someone who really needs it. So this is a flawed solution, and usually what happens with, with price caps is once they get lifted, you get a surge of inflation. And then the second option is just to give people money, which is something that has been happening in Europe, right, where energy costs have gone up in the last few years. The issue with that is if your worry is inflation, just giving people cash is not going to fix the inflation issue. If anything, it's just going to make it worse. Essentially, economists don't like either of those two options, which is why they're not seriously being discussed. And then now, I know I said two options, but there's obviously a third, which is, is raising interest rates. The Fed can decide that rising energy prices are turning into a real inflation problem and that you reduce the supply of money effectively that's available to businesses by raising interest rates. And, you know, the Fed just raised rates. And while that, you know, was not necessarily driven by oil prices, if we see more of this energy inflation shock seeping through into other categories, if we start seeing in surveys that people are getting more worried about inflation, which is always a very big deal that economists look for, it'll be likely that the Fed will be more aggressive in raising interest rates. And that's really the most straightforward way to deal with it. Benoit Morin covers the oil and gas industry for us out of Houston. And Conrad Puzier is a journal economics reporter based in New York. Benoit, Conrad, thank you both so much. Thank you. Thanks for having us. And that's it for What's News Sunday for September 20th. Today's show was produced by Daniel Bach, supervising producers Sandra Kilhoff and Melanie Roy. I'm Luke Vargas, and we will see you next time. I'll be back tomorrow morning with a brand new show. Until then, thanks for listening.