Iran War: What It Means for Fuel Markets and Why It’s Even More Complicated Than You Think

If you’ve been following the news this past week, you know the basics: the U.S. and Israel launched strikes on Iran on February 28th, Iran hit back across the Gulf, and energy markets went haywire. But if you’re trying to figure out what this actually means for fuel prices – at the pump, for your business, or for the energy transition – the headlines don’t tell the whole story.

The fuel market implications of this conflict are far-reaching and genuinely complicated. Politicians and commentators have been quick with confident takes, but the Stillwater team has spent the past week digging into the details, and the picture is more nuanced. Here’s what we’re watching and why we think the simple “oil shock” framing misses some of the most important dynamics.

 

This Isn’t the Oil Shock You Remember

The instinct when conflict erupts in the Middle East is to flash back to the Gulf War and expect crude prices to double overnight. That hasn’t happened. Brent crude surged from around $73 per barrel in February to settle at $94 per barrel on March 9. This represents a significant increase, but not the terrible scenario some dreaded. The reason is structural: North American energy production has fundamentally changed the game. U.S. and Canadian investment in domestic crude and natural gas means the continent is far less exposed to a loss of Middle Eastern supply than it was in 1991, or even 2003.

That’s not to say crude markets are calm. The near-total shutdown of tanker traffic through the Strait of Hormuz, a passageway for roughly 20% of the world’s daily oil supply, represents a real supply crisis. The immediate trigger wasn’t actual attacks on shipping so much as insurance: within 96 hours of the initial attacks, major marine war-risk insurers cancelled coverage for Gulf waters, and without insurance, ships don’t sail. The Trump administration has since announced a $20 billion U.S. government reinsurance backstop through the International Development Finance Corporation – a significant intervention – though it’s worth noting that government insurance doesn’t cover the total loss scenarios that make captains and crews most reluctant to transit.

 

We’re watching jet fuel and LNG markets closely

The comparison that keeps coming up in our team’s discussions is Russia-Ukraine in 2022 which was fundamentally a European natural gas crisis, not a crude oil crisis. The Iran war is shaping up to be a similar story, but with global reach; and it is jet fuel and LNG that are the real pressure points, not crude.

Jet fuel prices have surged dramatically, especially in Europe as it has become more dependent on middle distillate (jet and diesel) imports from the Middle East. As noted in the New York Times, it will be difficult to recover those imported volumes to Europe from other parts of the world as countries in the Americas and Asia-Pacific safeguard their own supply.

On the LNG front: Qatari LNG production is equivalent to about 20% of global supply, and Qatar’s massive Ras Laffan complex declared force majeure after drone attacks. In response, natural gas prices in Europe and Asia spiked by 50% from the previous year.

 

The West Coast Is More Exposed Than Most

Regionally, the U.S. is in a relatively strong position. As a net energy exporter, higher prices hurt consumers but benefit producers. The Midwest in particular is well-insulated, supplied primarily by domestic and Canadian crude.

The West Coast is a different story, and it’s one we’re watching closely. California has already crossed $5 per gallon at the pump. That’s partly due to the conflict, but it’s also converging with two other pressures. First, California’s refinery base is shrinking. Two more refineries have closed recently, leaving the state increasingly reliant on imports of refined petroleum products from Asia. The largest sources of those imports have been India and South Korea, both now dealing with their own supply disruptions and competing for the same scarce cargoes. Second, the seasonal switchover to summer-blend gasoline was already underway when the conflict began, adding cost pressure on top of the crude price spike.

West Coast refineries are also configured primarily to run heavier, sour crude — the type sourced from the Middle East, Alaska’s North Slope, and Canada via the Trans Mountain pipeline. Alaska North Slope prices have hit record highs. The TMX pipeline, which ships Alberta oil sands crude to Burnaby, B.C. for Pacific loading, is running near capacity and is an increasingly important piece of the West Coast supply picture as Asian buyers and West Coast refiners compete for the same barrels.

The pause in marine shipping from the Gulf also means a pause in refined product imports to the West Coast at exactly the wrong moment. Supply buffers are limited. We expect continued upward pressure on regional retail prices until either the Strait situation normalizes or alternative supply routes are firmly established.

 

What About the Energy Transition?

Here’s where it gets particularly interesting for those of us who track low-carbon fuel markets. The intuition is that higher fossil fuel prices are good for clean alternatives. The reality is more complicated, and for jurisdictions with low carbon fuel (LCF) programs, the dynamics actually cut in the opposite direction from what you might expect.

When gasoline and diesel prices rise sharply, consumers drive less and demand for petroleum products falls. In LCF markets, decreased gasoline and diesel usage means smaller deficits and less demand for the LCFS credits that low-carbon fuel producers depend on for their economics. Reduced credit demand pushes credit prices down, compressing the value stack for advanced low-carbon fuels. Paradoxically, a sustained crude spike could make it harder, not easier, to attract the least carbon-intensive alternative fuels into regulated markets.

The potential winners in this environment are conventional biofuels (think corn ethanol and biodiesel from soybean oil) which are less dependent on credit premiums to be economically competitive, and EVs, where fuel cost savings relative to gasoline become more compelling the higher pump prices climb. Advanced low-carbon fuels, including sustainable aviation fuel and some renewable diesel pathways, may find the economics temporarily tougher even as crude prices rise.

The Stillwater team tracks and compares the value stacks for renewable fuels in West Coast markets on our LCFS Data Dashboard, giving subscribers insight into how current market conditions affect specific fuel pathways. Be sure to watch that space for impacts on LCF markets.

 

What We’re Watching

This situation is evolving quickly, and there’s genuine uncertainty about duration and scope. The single most important variable is how long the Strait of Hormuz remains effectively closed to normal traffic. A few weeks is a manageable supply disruption. Several months starts to look like a structural realignment. A few things on our watchlist:

1. Qatar’s Ras Laffan facility — the timeline for LNG production resumption is the key variable for global gas prices and Asian market stability.
2. West Coast refined product supply — particularly how quickly alternative supply routes can be established given California’s reduced refinery capacity.
3. LCFS credit markets — whether demand destruction in petroleum products is large enough to move the needle on credit demand, and which fuel pathways are most affected.
4. LNG injection season — Northern Hemisphere gas storage needs to rebuild through the summer. If disruptions persist into the injection window, the risk of another winter supply crunch grows significantly.
5. TMX and Canadian crude flows — Trans Mountain is well-positioned to benefit, and its utilization and pricing dynamics are a useful real-time signal for Pacific Basin supply conditions.

We’ll continue to evaluate and provide analysis as the situation develops. In the meantime, if you’re trying to make sense of what this means for your specific market, supply chain, or investment thesis — reach out. This is exactly the kind of situation where the details matter.