Global crude oil prices have been volatile this month, swinging as much as $35 in a single day. They're also high — around $110 per barrel right now. But they didn't rise as much or as quickly as some analysts might have expected.
The Strait of Hormuz, the single most important waterway for global oil trade, has been largely blocked to tanker traffic for weeks now. That kind of disruption might be expected to send prices up, sharply and consistently. So why have prices been prices on this strange roller coaster instead?
In a word: uncertainty.
"The oil market right now is in the midst of this almost like 'Schrödinger's cat' of the largest oil supply shock in the history of the oil market," Rory Johnston, an oil markets researcher, said last week.
Schrödinger's cat is the famous thought experiment designed to illustrate a core principle in quantum mechanics. Picture a cat inside a box, next to a vial of poison elaborately connected to a sample of radioactive material. If a single atom of that sample decays, the vial breaks, and the cat dies.
The cat is either alive or dead, but from outside the box you don't know which. In fact, in the strange world of quantum mechanics, the cat is actually both at once … until someone opens the box.
In the oil version, the world is either in its worst oil crisis ever, or things are basically fine. For weeks, both cases have seemed equally plausible to the market.
The "cat's dead" scenario is a prolonged war that disrupts the trade of oil from the Middle East for months. "If this persists, it will be bigger than the oil shocks of the 1970s," Johnston said.
For decades, oil market watchers have worried about the closure of the strait as a worst-case scenario. It's basically impossible for the world to fully make up the resulting shortfall in oil supplies through tapping stockpiles or sending crude through alternate routes. A prolonged closure would send prices soaring much, much higher than we see today.
But if the war ends, say, tomorrow, it'll turn out that we're in the "cat's alive" situation. "Theoretically, if Trump were to pull back right now, the oil market could begin to heal itself," Johnston said.
The world had a lot of extra crude oil floating around before this conflict began. That buffer means that a short disruption would not be catastrophic. So if the strait is poised to reopen soon, and oil fields and facilities in the Gulf region haven't been damaged too severely and can restart production within a few weeks … well, then, prices shouldn't go crazy at all.
And markets have a reason to anticipate a short war. In recent years, a whole series of geopolitical crises have been resolved quickly, from attacks on Saudi refineries to the U.S.-Israeli attacks on Iran last year to the U.S. military operation in Venezuela. Even Russia's full-scale invasion of Ukraine did not disrupt oil supplies as profoundly as the market first feared — although the conflict itself remains ongoing. Time and again, buying when oil prices were high after an attack has been a good way to lose a lot of money, and traders remember that.
So which is it: a long war or a short one? The two possible realities suggest very different logical paths for oil prices.
Or as Dan Pickering, chief investment officer of Pickering Energy Partners, put it: "You could put on two different hats about crude today: 'Why is it so high? Because this war is going to be over soon,'" he said. "The other would be, 'Why is it so low, when 20% of global oil supply is bottlenecked behind the Strait of Hormuz?'"
Mixed signals and disconnection
Throughout this conflict, the market has been getting mixed signals. The White House has issued contradictory messages on the goals and timeline for the war. And some of those statements contradict evidence.
"There keeps being this idea that, oh, we're going to have, you know, naval escorts, or we've taken out all of their ballistic missiles," said Ellen Wald, a nonresident senior fellow with the Atlantic Council Global Energy Center and the author of Saudi, Inc. "And yet the situation on the ground is that drones are still flying; missiles are still flying across the strait."
Oil is a physical, tangible good. But it's also a "paper market," a commodity traded in the abstract, prices moving on a screen.
And there's been a disconnect between that physical world — where spot prices for fuel are soaring in the Middle East, jet fuel prices have doubled, and countries like Pakistan and Bangladesh are closing schools and rationing fuel — and the commodity markets, where every time prices have started to spike, a social media post from the president about productive talks, or a headline pointing toward a shorter conflict, sends them tumbling back down.
At least, that was the pattern. Markets may be shifting closer to a reckoning with a longer, sustained disruption. In the second half of this week, prices rose by $10 a barrel, and so far have stayed there — despite a post by the president stating talks were going well.
Al Salazar is the head of macro oil and gas research at Enverus, an energy data company. "The fact that we're up another $10 with a seeming extension of the closure of the strait," he said Friday, "is probably taking the hope away that this could be resolved quickly."
A feedback loop
Crucially, unlike in the original Schrödinger's cat scenario, what's happening inside the box isn't determined by chance. President Trump is one of the key decision makers.
As a result, his comments move the market. But the market also influences Trump. He watches oil and stock prices very closely, and he's reversed policies before when markets signaled they'd crash the global economy. (Wall Street has even coined a nickname for the pattern: TACO, for "Trump Always Chickens Out.")
"There is a feedback loop here where high prices create more anxiety for the administration, which could either create an end to the conflict or an increase in intensity," said Pickering.
But Trump doesn't seem to be feeling acute pressure at the moment; he's commented that high oil prices are actually good for the U.S., and recently said, "I thought the oil prices would go up more, and I thought the stock market would go down more."
There's a strange possibility lurking here: Oil prices have been kept in check in large part because traders think a short war is likely. By removing market pressure on Trump, does that accidentally encourage a longer war?
Bob McNally, the founder of Rapidan Energy Group and the author of Crude Volatility, frames the question like this: Is the market "delaying the price signals that would otherwise jar the president and his advisers into either seeking to end the conflict or accelerating it one way or the other?"
His take: "Yes. Yes, it is."
Putting off a price signal
A delayed reaction has other implications, too. High prices are how markets solve a supply shortage. When oil becomes expensive, that pushes consumers to use less gasoline and other petroleum products. Meanwhile, high prices motivate oil companies to produce more, prompting them to add production that wouldn't be profitable at lower prices. Supply goes up and demand goes down. The two together bring the system back in balance.
But if price hikes are delayed, said Rory Johnston, they might be more painful later. If the war doesn't end tomorrow, and we're indeed in the worst case scenario, keeping oil prices down now means we're "mortgaging the present for an even worse outcome in the future," he said.
You, reader, are one factor in this complicated feedback system. Your demand for gasoline affects its price, and its price affects you.
On average, U.S. gasoline has gone up by about a dollar a gallon — but that's nowhere close to where it could be if the war is prolonged. "The average person on the street right now does not fully appreciate the scale of the calamity that we are currently facing," said Johnston.
Ed Crooks, vice chair of the Americas at the consultancy Wood Mackenzie, agrees: "The full effects of the Strait of Hormuz being almost entirely closed have not yet hit American consumers," Crooks said.
So they've kept driving, and demand has stayed steady. For now.
The oil shortfall caused by this crisis is around 10 million barrels a day, roughly equivalent to how much demand dropped during the worst of the COVID-19 pandemic. Back then, travel bans and lockdowns led to sharp, worldwide decreases in driving and flying. So consider: How much would gasoline have to cost before the world chooses to cut travel as much as it was forced to then?
If Schrödinger's box opens to reveal a long-term war, we might all find out the answer.
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