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Why Isn’t the Price of Oil Even Higher?

Paul Krugman Krugman Wonks Out

Date Posted:: August 14, 2026

Krugman asks why crude is “only” ~$25 above its prewar level. Much of the world’s refining capacity is trapped behind Hormuz or offline, raising the “crack spread” – the premium on refined products like diesel – while depressing the crude oil price.

The difference between the price of a barrel of crude and the price of the products refined from that barrel — the “crack spread” — has exploded, rising about $35/barrel since the eve of the war. Why has the crack spread widened so much? The main answer is that a lot of the world’s refining capacity is either trapped inside the Strait or offline as a result of Ukraine’s drone campaign. It’s not all about Iran. The shortage of refining capacity has held crude prices down, as buyers won’t pay extremely high prices for crude they can’t refine. Or to put it differently but equivalently, the cutoff of oil shipments through the Strait of Hormuz, in effect, required a large rise in global prices [of petroleum products] to ration demand, but much of that rationing has taken place through a rise in the crack spread rather than a rise in crude oil prices.

Takeaways by Macro Roundup^® AI

The crack spread — the margin between crude oil and refined product prices — has widened by ~$35/barrel since the Strait of Hormuz closure, absorbing price rationing that would otherwise have driven crude prices sharply higher.
Constrained global refining capacity, hobbled by both Hormuz-trapped facilities and Ukraine’s drone campaign against Russian infrastructure, suppresses crude demand and caps crude prices by limiting buyers’ willingness to pay for unrefinable oil.

U.S. Economy Less Vulnerable To Geopolitical Oil Price Shocks Than In The Past

Lutz Kilian, Michael Plante and Alexander Richter Federal Reserve Bank of Dallas

Date Posted:: June 25, 2026
Is Database:: Database

Kilian, et al find that the impact of an energy shock on US real GDP growth has fallen to 1/20th of what it would have been in 1980, due both to the declining share of oil in GDP and the US transition from net importer to net exporter.

The 2026 disruption of global oil supplies has been more than twice as large as the peak disruption during the 1973 oil crisis, the largest oil supply shortfall on record before 2026. It has been widely noted that the shale oil revolution has allowed the U.S. to greatly reduce its dependence on imports of crude oil and refined products. Whereas the U.S. economy had been a major net importer of oil and oil products since the 1970s, the U.S. became a net exporter in late 2019, if only by a small margin (Chart 2, panel A). In addition, oil and oil product expenditures as a share of GDP substantially declined from a high near 8% in 1980 to 3% in 2024 (Chart 2, panel B). Reduction of world oil supply [as in the 2026 Iran War] would have caused annualized U.S. real GDP growth to decline by 5.6pp in 1980; the same event today reduces growth by only 0.3pp, one-twentieth of the 1980 decline (Chart 3). Our analysis demonstrates that the US contraction in response to a geopolitical oil supply disruption was similar to that in the rest of the world in 1980. This is no longer the case. A global oil supply disruption of 15% today causes a decline in annualized real GDP growth of 1.7pp in the rest of the world, compared with only 0.3pp in the U.S.—roughly one-sixth of the response in the rest of the world.

Global Market Views: Shortages

Dominic Wilson and Kamakshya Trivedi Goldman Sachs

Date Posted:: May 19, 2026
Is Database:: Database

Goldman estimates the market is now pricing US growth at 2.5%, past their own 2027 forecast of 2.2%. After the Iran-ceasefire relief rally, AI-related equities are quietly taking credit for substantial macro benefits that haven’t been delivered yet.

The Iran ceasefire and the reduction in deep downside tails have allowed the market to look ahead and compress risk premia across a range of assets. That type of narrowing in the distribution is often associated with sharp market gains in situations of fundamental uncertainty, and this has proved to be the case again. Despite oil prices and yields staying elevated, a broad range of assets—including US equities, high carry/commodity FX, and EM—have recovered smartly, and renewed AI optimism has pushed those exposures to new cycle highs. The common element is that shortages—in commodities and the AI supply chain—are driving capital flows. Those tensions mean that even if we avoid the worst tails, we are likely to see volatility rise alongside further equity price increases.

Takeaways by Macro Roundup^® AI

Shortage-driven volatility dynamics result in simultaneous equity price increases and rising market volatility, creating asymmetric upside amid fundamental uncertainty.
Global Market Views: Shortages.
The Iran ceasefire and the reduction in deep downside tails have allowed the market to look ahead and compress risk.

This Time is Different (from 2022) — The Impact of Higher Energy Prices on European Manufacturing Industries

Niklas Garnadt Goldman Sachs

Date Posted:: April 23, 2026
Is Database:: Database

Per GS, the current energy shock will lower Europe’s industrial production by ~2%, ½ the ~4% decline that occurred during the 2022 shock. As the current shock is global, also hitting Asia, Europe does not face the competitive disadvantage it did in 2022.

[We] project that higher oil and gas prices [will] lower Euro Area industrial production by almost 2% by end-2027 relative to our pre-conflict baseline, with negative IP growth later this year but a return to positive growth in 2027. This compares to an estimated drag of 4% during the energy crisis of 2022/23. The current price shock is expected to be smaller and less persistent, while the decoupling from Russian pipeline gas that began in 2022/23 has been sustained. The 2022/23 crisis was fundamentally driven by a sharp reduction in Russian pipeline gas supply to Europe and impacted a narrow set of highly gas-intensive industries particularly hard. The current shock is primarily an oil supply one that tends to reduce industrial production more broadly. However, in 2022/23, energy market shifts were largely focused on Europe, leading to major cost disadvantages for energy-intensive industries, particularly relative to China, and a surge in import competition. This time, energy price pressures are more global, with Asia appearing to be affected to a similar (or even greater) extent. European energy-intensive industries therefore look less exposed to competitiveness pressures.

Takeaways by Macro Roundup^® AI

European industrial production faces a 2% hit by end-2027 from oil price shocks, half the 4% impact from 2022–23 Russian.
Oil-driven shocks impact capital goods and export sectors broadly, whereas 2022–23 gas crisis concentrated damage on gas-intensive industries, shifting vulnerability.
Global energy price pressures on Asia limit European competitiveness losses versus 2022–23, when regional energy cost disparities drove import substitution.

The Hormuz Blockade Is as Much About China as Iran

Javier Blas Bloomberg

Date Posted:: April 14, 2026
Is Database:: Database
Is Important:: Important

Before the war, Iran was earning ~$100mm a day from oil exports, which rose to ~$175mm during the war, before the blockade. The US “maximum pressure” campaign of 2018–2021 had reduced Iran’s oil revenue to ~$10mm a day without changing Tehran’s behavior.

According to my back-of-the-envelope calculations, Iran was making about $100 million a day selling its crude before the war. Since Feb. 27, that’s risen to around $175 million a day. If the US enforces the blockade, the Iranian economy will suffer an enormous blow on top of the war destruction. But whether that economic hit translates into a softer negotiation approach remains to be seen. Targeting Iranian oil revenue has been tried before — and it failed. In 2020-2021, when Trump launched a maximum pressure campaign of sanctions, Iranian crude exports dropped to fewer than 250,000 daily barrels for several months just as oil prices were depressed due to the impact of the pandemic. Even allowing for some exports slipping under the radar, Iran was earning no more than $10 million a day selling crude — and it still didn’t buckle.

Takeaways by Macro Roundup^® AI

Iranian crude revenue surged 75% to $175m daily since Feb. 27, yet prior sanctions reducing exports to 250,000 barrels daily.
A Hormuz blockade targeting Iranian oil drives economic pressure, but 2020–2021 maximum sanctions demonstrated sanctions alone don’t guarantee policy concessions.

U.S. Crude Oil Production Rose In 2025, Setting New Record

Naser Ameen Energy Information Administration

Date Posted:: April 1, 2026
Is Database:: Database

American crude production expanded 3% in 2025 to a new record of 13.6mm bpd. The rig count fell 5% in the lower 48 states as productivity improved.

U.S. crude oil production grew by 3%, or 350,000 barrels per day (b/d), in 2025, setting a new annual production record of 13.6 million b/d. Production from the Lower 48 states excluding the Gulf of America (L48) accounted for 11.3 million b/d, or 83% of the total U.S. crude oil production in 2025. The rest of the production came from Federal Gulf of America (GOA) and Alaska. In 2025, the number of active rigs per month in L48 was 5% less than in 2024 and 1% fewer wells were drilled. Despite less rig activity and fewer wells, efficiency improvements that we saw in 2024 continued through 2025 and resulted in a slight increase in crude oil production, with new wells producing 2.9 million b/d of crude oil and wells drilled prior to 2025 producing 8.3 million b/d. Rig and well activity fell in 2025 compared with 2024 because West Texas Intermediate (WTI) crude oil prices fell from $77/barrel (b) in 2024 to $65/b in 2025.

Takeaways by Macro Roundup^® AI

U.S. crude oil production reached a record 13.6 million barrels per day in 2025, growing by 3%.
Production from the Lower 48 states accounted for 83% of total U.S. crude oil output in 2025.
Despite fewer active rigs and wells, efficiency improvements led to increased production levels.

Fighting Words: The Energy Transition in 2026

Michael Cembalest J.P. Morgan

Date Posted:: March 3, 2026
Is Database:: Database

As measured by useful final energy consumption in 2024, nuclear provided 6% of America’s 44.5 exajoules, renewables 9%, and fossil fuels 85%. The corresponding numbers for China’s 87.7 exajoules were nuclear 2%, renewables 13%, and fossil fuels 85%. Coal was 54% of China’s consumption and oil 18%, relative to 8% and 30%, respectively for the US.

Energy is lost as waste heat in conversion of fuel energy to motion in internal combustion engines, and in conversion of heat to electricity. For example, if you use primary energy to estimate how much electric power is needed to replace oil in passenger cars, you would overestimate the power needed since electric motors are 80%-90% efficient at converting electricity to motion compared to 18% efficiency for gasoline cars. A better approach [is estimating] the energy net of waste heat that is actually consumed by end-users; this would help avoid overly high projections of fossil fuel demand in a more electrified world due to this “primary energy fallacy.” A few years ago I constructed a measure of useful final energy (UFE) that I use for my energy charts. With this approach, we can get closer to useful final energy actually consumed by end users. [For example the US consumed 45 exajoules (EJ) of useful final energy in 2024 compared to 95 EJ of primary energy.]

Krugman asks why crude is “only” ~$25 above its prewar level. Much of the world’s refining capacity is trapped behind Hormuz or offline, raising the “crack spread” – the premium on refined products like diesel – while depressing the crude oil price.

Is refining capacity the missing link in energy price inflation?

Takeaways by Macro Roundup® AI

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Kilian, et al find that the impact of an energy shock on US real GDP growth has fallen to 1/20th of what it would have been in 1980, due both to the declining share of oil in GDP and the US transition from net importer to net exporter.

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Goldman estimates the market is now pricing US growth at 2.5%, past their own 2027 forecast of 2.2%. After the Iran-ceasefire relief rally, AI-related equities are quietly taking credit for substantial macro benefits that haven’t been delivered yet.

Does reduced geopolitical risk mask persistent supply constraints in commodities and technology?

Takeaways by Macro Roundup® AI

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Per GS, the current energy shock will lower Europe’s industrial production by ~2%, ½ the ~4% decline that occurred during the 2022 shock. As the current shock is global, also hitting Asia, Europe does not face the competitive disadvantage it did in 2022.

Takeaways by Macro Roundup® AI

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Before the war, Iran was earning ~$100mm a day from oil exports, which rose to ~$175mm during the war, before the blockade. The US “maximum pressure” campaign of 2018–2021 had reduced Iran’s oil revenue to ~$10mm a day without changing Tehran’s behavior.

How does the Hormuz blockade impact China's role in the region?

Takeaways by Macro Roundup® AI

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American crude production expanded 3% in 2025 to a new record of 13.6mm bpd. The rig count fell 5% in the lower 48 states as productivity improved.

Takeaways by Macro Roundup® AI

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Takeaways by Macro Roundup^® AI

Takeaways by Macro Roundup^® AI

Takeaways by Macro Roundup^® AI

Takeaways by Macro Roundup^® AI

Takeaways by Macro Roundup^® AI