Gas is nearly $4 again and diesel just topped $5. It’s not what you think
Gas is nearly $4 again and diesel just topped $5. It’s not what you think
Gas is nearly 4 again and diesel - US gas prices have soared as tensions with Iran persist, with the average cost climbing to $3.94 per gallon after a weekly increase of 15 cents. Diesel prices have also surged, reaching $5 a gallon for the first time in three weeks, as reported by AAA. These spikes highlight the growing strain on consumers’ budgets from the ongoing military conflict in the Persian Gulf. Yet, the situation is more complex than a simple link to oil prices.
Rising fuel costs are no longer solely tied to fluctuating oil prices. While the Strait of Hormuz was partially open for three weeks, oil companies managed to ship over 200 million barrels of crude, temporarily lowering oil prices below pre-war levels. However, gas and diesel prices didn’t follow suit, showing a steeper increase. The collapse of the Memorandum of Understanding between Iran and the US last week sent oil prices back above $85 a barrel, after hovering near $70 for weeks. This shift has amplified the impact on fuel costs, as crude constitutes most of gasoline’s price.
The Role of Refineries
Gas and diesel prices have diverged from oil market trends, largely due to refining constraints. Despite the temporary calm in the Strait of Hormuz, refineries couldn’t adjust output quickly. Iran’s attacks damaged or destroyed 30 Middle Eastern refineries, limiting the ability to recover from the disruption. Global refining capacity dropped by 3 million barrels at the peak of the crisis, with 2.1 million barrels still offline, according to Natasha Kaneva, chief commodities economist at JPMorgan.
Meanwhile, Ukraine’s drone strikes have crippled Russian refinery operations, transforming the world’s second-largest diesel exporter into a net importer. This has worsened the global diesel shortage. In contrast, US refineries have operated at 96% capacity, processing the highest volume of crude since 2019. Yet, a record amount of American fuel is being sent abroad, particularly to Europe for jet fuel and Asia for diesel, to offset international supply gaps. As a result, US gasoline inventories have hit their lowest levels since 2012, sitting just 20 million barrels above critical thresholds, per Andy Lipow, president of Lipow Oil Associates.
A Supply and Demand Imbalance
The balance between supply and demand is driving prices higher. With summer travel increasing gasoline demand and diesel consumption nearing its peak ahead of the fall harvest, low inventory levels and high demand are creating a volatile market. This has pushed crack spreads—the profit margin for refineries—to record highs. Gasoline crack spreads are up 60% year-over-year, while diesel and jet fuel spreads have more than doubled since 2025, as noted by the US Energy Information Administration.
“Low supply and high demand are a recipe for high prices,” said Andy Lipow.
Compounding the issue, extreme summer heat is challenging refinery efficiency. These facilities require cooler conditions to boil crude into components like gasoline, diesel, and jet fuel. When temperatures rise, production slows, and output declines. This creates a feedback loop: reduced supply pushes prices higher, while elevated prices strain refineries further, limiting their ability to meet domestic demand.