Impact of Oil Supply Shocks on U.S. Gasoline Prices

a rising gas cost and a historical perspective

Jun 16, 2025

Gasoline Price Impact of Strategic Choke Points and Historical Events

Impact of Oil Supply Shocks on U.S. Gasoline Prices

Rising Gasoline Prices and Permian Basin Pressures

U.S. gasoline prices have been climbing in part due to supply-side pressures on oil producers in the Permian Basin. The Permian is America’s top shale oil region, but new regulatory and cost challenges are emerging. For example, Texas regulators recently tightened rules on wastewater disposal, raising operating costs for Permian drillers. Smaller producers now must truck water farther and invest more to comply with these rules, adding expenses. Coupled with periods of relatively low crude prices (around the low $60s per barrel in early 2025), these factors have slowed drilling activity. In effect, the Permian’s rapid production growth is moderating, which restricts domestic oil supply growth. This puts upward pressure on crude oil and gasoline prices. As U.S. oil output growth stalls while demand remains solid, prices at the pump inch up. In May 2025, the U.S. Energy Information Administration projected national retail gasoline to average about $3.10/gal for 2025, but unforeseen disruptions could push prices much higher.

Strategic Chokepoints: Hormuz, Bab el-Mandeb, and Suez

Beyond U.S. supply issues, global oil prices – and by extension U.S. gas prices – are hugely influenced by strategic maritime chokepoints. Three corridors are especially critical for oil transit: the Strait of Hormuz, the Bab el-Mandeb (Red Sea gateway), and the Suez Canal (plus the SUMED pipeline in Egypt).

Historical Oil Supply Shocks and Gas Price Spikes

To estimate the impact on U.S. gasoline prices under such a scenario, it’s instructive to look at historical oil supply crises. Past events like embargos, wars, and canal closures caused gasoline shortages or price spikes. Below, we review comparable events and their effects on gas prices, including inflation-adjusted figures to put them in today’s context.

Suez Crisis (1956)

In October 1956, the Suez Canal was nationalized by Egypt and war broke out when the UK, France, and Israel invaded. The canal closed from late 1956 into early 1957, blocking Middle East oil shipments to Europe. The U.S. was less dependent on Mideast oil then, so American gasoline supplies were not critically short, but prices did rise modestly. The average U.S. gasoline price in 1956 was about $0.30 per gallon. That sounds tiny, but adjusting for inflation it equals roughly $3.50–$3.60 per gallon in today’s dollars. Europeans faced rationing – in Britain, petrol shot up to the equivalent of £4.50 per gallon in today’s money and ration coupons were readied. The Suez Crisis demonstrated that even a partial supply disruption could stir panic buying. However, the global oil system (and U.S. domestic production) compensated enough that U.S. drivers did not experience severe shortages.

Six-Day War and Suez Closure (1967)

In June 1967, another Arab-Israeli war erupted. The Suez Canal was shut down again in 1967, and remarkably it remained closed for eight years (until 1975). Oil shipments had to reroute around Africa. Additionally, some Arab exporters imposed a brief embargo on the U.S. and others for supporting Israel. In the late 1960s, the U.S. still had spare oil production capacity and even oil import quotas, so the impact at American pumps was muted compared to the 1970s. The average U.S. gas price in 1967 was around $0.33 (about $3.1–$3.2 in 2025 dollars). There were no widespread gas lines in the U.S. at that time. But the groundwork was laid for the more profound crisis to come, as global spare capacity tightened by the early 1970s.

Arab Oil Embargo (1973–1974)

The 1973 oil shock was a turning point for U.S. gasoline prices. After the Yom Kippur War in October 1973 (when Israel fought Egypt and Syria), Arab OPEC members retaliated against Western supporters of Israel by cutting oil exports. Starting in October 1973, OAPEC (led by Saudi Arabia) placed an embargo on the U.S. and others, while also slashing overall output. The global oil supply drop was on the order of 5 million barrels per day, about a 7% cut – enough to wreak havoc. By March 1974, crude oil prices had quadrupled (from about $3 to $12 per barrel).

For consumers, this meant gasoline shortages and long lines at gas stations in 1974. In many U.S. cities, drivers faced odd-even rationing days based on license plates. Prices jumped sharply: the U.S. average gas price went from $0.36 in 1972 to $0.39 in 1973 and then $0.53 in 1974. While those numbers seem low, remember gas was much cheaper then. In today’s terms, 1974’s $0.53/gal is about $3.40–$3.60 per gallon. That was roughly a 40% real increase over the 1972 price (about $2.75 today). By 1974, inflation was running in double digits and the U.S. economy was in recession, partly due to the oil shock. This event highlighted America’s vulnerability to Middle East supply disruptions – a scenario where, even though the Suez Canal was still closed from 1967, the additional embargo caused an unprecedented gasoline crisis.

Iranian Revolution and Iran-Iraq War (1979–1980)

The next major shock came at the end of the 1970s. In 1978–1979, Iran underwent an Islamic Revolution, which toppled the Shah and drastically cut Iran’s oil exports. Iran had been a major supplier to the U.S., so this removed about 5% of world oil supply. Panic set in on world markets, and prices soared again. Then in 1980, the newly founded Islamic Republic of Iran was invaded by Iraq, starting the Iran–Iraq War. That conflict escalated the disruption – by 1980, about 8% of global supply was off-line due to the war. Both Iran and Iraq’s exports were curtailed, and fighting in the Persian Gulf (the so-called “Tanker War”) put ships at risk, though the Strait of Hormuz was not fully closed.

American drivers experienced a second bout of gas lines in 1979. The national average price, which was $0.86 in 1979, jumped to $1.19 in 1980 and $1.31 by 1981. The 1979–1981 period remains one of the highest for gasoline prices in U.S. history. $1.31 in 1981 equates to roughly $4.50 in today’s dollars – exceeding even the 2008 or 2022 price peaks in real terms. The all-time inflation-adjusted record for U.S. gasoline was in the early 1980s, around $4.60–$4.80 per gallon in 2023 dollars. These high prices reflected the fear that the entire Persian Gulf might become a war zone. In response, countries like Saudi Arabia did ramp up output to mitigate the crisis, and the U.S. government established a Strategic Petroleum Reserve (SPR) to buffer future shocks. By the mid-1980s, oil supply caught up with demand and prices crashed, but the late 1970s taught a hard lesson about how a major Middle East disruption can send gas prices soaring by 2-3× in a short time.

Gulf War (1990–1991)

In August 1990, Iraq (under Saddam Hussein) invaded Kuwait, seizing its oil fields. Fears mounted that Saudi Arabia might be next, potentially putting nearly 20% of world oil in hostile hands. The immediate effect was removal of Kuwaiti and Iraqi oil from the market and the threat of broader conflict near Hormuz. Oil prices spiked from about $20 to $40 per barrel in fall 1990. The U.S.-led Coalition’s intervention (Operation Desert Storm in early 1991) quickly liberated Kuwait. The gasoline price impact was relatively short-lived: U.S. average gas rose from $1.15 in 1990 to $1.14–$1.16 in 1991 (roughly $2.70 in today’s terms). In other words, there was a spike in late 1990, but by annual average, prices remained around $1.15, and fell back after the war. The Gulf War’s threat to Hormuz was significant in theory, but swift victory and abundant non-Gulf supplies (plus use of strategic reserves) prevented a repeat of the 1970s-style pump misery in the U.S.

Somali Pirate Raids (2008–2011)

A very different kind of disruption emerged in the late 2000s off the coast of Somalia. From 2008 to 2011, Somali pirates in the Gulf of Aden and Indian Ocean hijacked hundreds of vessels, including some large oil tankers. In November 2008, pirates captured the MV Sirius Star, a supertanker loaded with 2 million barrels of Saudi crude. Such incidents raised insurance costs and forced shippers to take protective measures or alternate routes. However, the impact on global oil supply was limited – navies formed convoys and patrolled, and only a tiny fraction of shipments were actually lost or delayed. The late 2000s saw high gas prices mostly due to fundamentals (booming global demand and tight supplies). For instance, 2008 gas prices averaged $3.27/gal in the U.S. (about $4.66 in 2023 dollars), but this record price was driven by global demand and a $147/barrel oil spike, not directly by piracy. By 2009, a global recession cut demand and prices fell sharply despite ongoing pirate activity. In sum, Somali pirate raids were a security concern and did add a small risk premium, but they did not cause a major fuel shortage. They are comparable to Houthi attacks in that they highlight vulnerabilities of maritime routes, albeit on a smaller scale.

Houthi Attacks in Yemen (2015–Present)

Since the mid-2010s, Yemen’s Houthi rebels have used missiles, drones, and mines to target shipping lanes in the Red Sea as part of the Yemen war. They have attacked oil tankers and even U.S. Navy vessels transiting near Yemen. A notable incident was in July 2018, when two Saudi oil tankers were hit (one sustaining minor damage), prompting Saudi Arabia to temporarily halt Red Sea oil shipments. This kind of disruption, if prolonged, could choke off the main route for Saudi and UAE oil heading to Europe via Suez. In 2018’s case, the halt was lifted within a week or two after security was increased. Oil markets reacted mildly – global prices rose less than 1% on the news. More recently, in late 2022 and 2023, Houthi forces have again threatened commercial ships in the Red Sea amid regional tensions. Each attack raises concerns that a critical passage could be mined or effectively closed. So far, the physical impact on supply has been contained. But these events serve as warnings of what could happen if a chokepoint like Bab el-Mandeb were fully blocked.

Recent Comparisons and Price Levels

For additional context, here is a summary of several key historical events when oil transit routes were blocked or major supply was cut, and how U.S. gasoline prices reacted (shown in both the nominal prices of the time and today’s inflation-adjusted terms):

4.5 interest rate checking

Event (Date)Disruption DetailsAverage U.S. Gas Price (at that time)Equivalent in 2025 $Suez Crisis (1956)Suez Canal closed ~5 months$0.30/gal~$3.5/galSix-Day War (1967)Suez Canal closed (1967–1975)$0.33/gal~$3.2/galArab Oil Embargo (1973–74)OAPEC embargo; ~5 MMbpd cut (Oct 1973–Mar 1974)$0.39/gal in 1973; $0.53 in 1974~$2.9/gal (’73); ~$3.6/gal (’74)Iranian Revolution (1979)Iranian exports halted; 5% world supply lost$0.86/gal (1979)~$4.0/galIran–Iraq War (1980)War blocks 8% of supply; Tanker attacks$1.19/gal (1980)~$4.9/galGulf War (1990)Iraq/Kuwait output lost; war in Gulf$1.15/gal (1990)~$2.7/galSomali Piracy Peak (2008)Hijackings in Aden/Red Sea; insurance costs$3.27/gal (2008)~$4.7/galHouthi Tanker Attacks (2018)Attacks near Bab el-Mandeb; Saudi halts briefly$2.72/gal (2018)~$3.3/gal

(Prices are U.S. annual average regular gasoline. Inflation adjustment to 2025 dollars uses CPI.)

As the table shows, the 1970s shocks caused American gas prices (in today’s money) in the $3–$4 range for the first time, and the 1979–1980 events pushed them to around $4.50–$5.00. The 2008 price spike – about $4.70 in 2023 dollars – was driven by market factors with no single chokepoint closure, but it gives a sense of an upper bound in recent decades. Notably, the worst-case scenarios (1973, 1979) involved multiple factors: embargoes or wars coinciding with transit route issues (in 1973 the canal was closed and an embargo hit; in 1979 the Iran war risked Hormuz). Those parallels are relevant to the hypothetical scenario at hand.

Potential U.S. Gas Price Impact If Hormuz and Red Sea Are Blocked

Scenario: Iran closes the Strait of Hormuz, and simultaneously Houthi forces (or other militias) aggressively attack tankers in the Red Sea, effectively cutting off the Bab el-Mandeb route. This could occur in the context of a wider conflict involving Iran (for instance, a war with Israel or Saudi Arabia). The Suez Canal might remain open, but without access from the Red Sea most Middle East oil can’t reach it. Essentially, two out of three major Middle East oil pathways would be severed.

The combined effect would be an acute global oil shortage. For a rough estimate: of the ~21 million bpd normally through Hormuz, perhaps only ~3–4 million could be rerouted via Saudi and UAE pipelines. If Houthi attacks stop traffic in the Red Sea, even those reroutes (to Red Sea ports) could be stalled. This suggests on the order of 15 million barrels per day removed from the world supply overnight. That is about 15% of global output – a shock larger than any in modern history. Even the 1973 embargo reduced supply by at most 9% for a few months, and the 1979 shock was around 5–8%. A 15% loss would send traders into a frenzy.

Oil price projection: Experts have modeled such extremes. Analysts at ING Bank note that a major Hormuz disruption could push oil to new record highs, beyond $150 per barrel. Some oil strategists suggest oil prices could even spike to $300+ per barrel in a short-term worst case. A rule of thumb in commodity markets is that if supply is severely curtailed, prices can spike to 5–10 times normal levels, according to one chief analyst at SEB Bank. That implies if oil was ~$70 before, it could leap toward the $350 per barrel range in a catastrophic scenario. In practice, nations would likely tap strategic reserves and take military action long before a months-long closure, but even a few weeks of blockade may see price overshoots well above the 2008 record ($147). For instance, Deutsche Bank analysts estimated that a full Hormuz closure (with no Iranian oil exports) could quickly send oil past $120 per barrel, and that was a conservative outlook assuming some mitigating responses.

Gasoline price projection: At the pump, U.S. gasoline prices would follow crude upward. The relationship isn’t one-to-one, but historically a doubling of oil price eventually translates to roughly a doubling of gas price, given refining and tax aspects. In this scenario, crude could easily triple from baseline. Consider that in June 2008, ~$140 oil yielded a ~$4.10 national average gas price. If oil hits $200, an analogous projection might put U.S. gas around $5.50–$6.00 per gallon. If oil shot to $300, gasoline could approach double that figure (potentially $8–$10 per gallon). These are ballpark figures; actual results would depend on refining bottlenecks and taxes too. It’s worth noting that California drivers – who pay higher taxes and use special fuel blends – might see even more extreme prices. (In fact, due to separate local factors, California was warned it could hit $8+ in coming years even without a global crisis.) Nationwide, a Hormuz-Red Sea chokehold would likely shatter price records. We could expect U.S. average gasoline well above $5. Some analysts have pointed out that if global markets panic, we might witness short-term gas prices on the order of the 1970s in real terms – meaning $6–$7 nationally (equivalent to the ~$4.50 inflation-adjusted record), and local spikes higher.

Another angle is to compare with the 1979–1980 situation. Then, about 8% of world oil was disrupted and U.S. gas hit ~$1.30 (which was ~$4.50 in today’s dollars). Now we are positing nearly double that supply loss (15%). It’s not a linear relationship, but going from an 8% shock to a 15% shock could plausibly double the price impact. That implies gasoline in the $7 to $10 per gallon range in 2025 dollars, until strategic reserves or demand destruction bring equilibrium. The U.S. government would almost certainly release oil from the SPR aggressively, as it did in smaller measure during the 2011 Libya conflict and the 2022 Ukraine crisis, to try to cap prices. Even so, SPR releases can only cover a portion of the lost barrels and only for a limited time.

Regionally, prices would surge everywhere, but differences between states would persist. Oil-producing regions like Texas might have slightly cheaper fuel than import-reliant regions like the East Coast or West Coast, but all would feel the pain. During past crises, California often had the highest prices (due to refining constraints and taxes), while the Gulf Coast states had the lowest. For example, at the peak in June 2022 (when the national average hit ~$5), California’s average was over $6 while some southern states remained in the high $4 range. In a Hormuz closure scenario, California could potentially see $8–$10/gal if the national average is $6–$7. States like New York or Illinois might not be far behind due to fuel taxes. More insulated regions (Texas, Louisiana) might be a dollar or two less, but still extremely high. In any case, all 50 states would experience unprecedented gasoline prices simultaneously – something that did not even happen in the 1970s (when some states still had gas under price controls).

Conclusion

The world has fortunately avoided a simultaneous closure of multiple oil transit chokepoints in the modern era. But if Iran were to make good on threats to close the Strait of Hormuz, and if conflict spread to also jeopardize the Red Sea routes near Yemen, the resulting oil supply shock would likely dwarf those of 1973 and 1979. Historical evidence shows that such disruptions cause sharp spikes in gasoline prices, often pushing inflation-adjusted costs to record levels. In the 1970s, U.S. gas prices more than doubled, reaching the equivalent of $3–$4+ per gallon in today’s money. Those crises involved either an embargo or a regional war – our scenario envisions both, across multiple chokepoints. Conservative estimates suggest U.S. gasoline could exceed $5 per gallon on average, while more dire forecasts put it well above $7 or $8 in a short-term squeeze, with regional averages in some states possibly hitting double digits in dollars per gallon.

Policymakers would have to respond with emergency measures: releasing strategic reserves, enacting fuel conservation policies, and diplomatically (or militarily) opening the shipping lanes. The economic shock could be severe, potentially tipping the U.S. and global economy into recession given the importance of fuel costs to commerce. The lessons of the 1970s and other incidents underscore the importance of protecting strategic oil corridors and maintaining buffer supplies. While U.S. shale (like the Permian Basin) has reduced reliance on imports, a crisis that spikes global oil prices will still hammer U.S. consumers. In a global oil market, no country is truly energy “independent” from such price shocks. Thus, the nightmare scenario of concurrent closures at Hormuz and the Red Sea would mean record-high gasoline prices for Americans – a painful reminder of the fragility of our energy supply lines in a volatile geopolitical environment.

Jacks-Stack: Finance

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