How the Iran war is raising more than Chicago's gas prices

Chicagoans are feeling squeezed by rising gas prices, following the U.S. and Israel's attack on Iran last month. And experts say the financial pain on consumers from the Iran war won't stop at the pump.

“It's going to be like a snake that swallowed a mouse," Rachel Bronson, senior fellow on energy and geopolitics at the Chicago Council on Global Affairs, said. "You're going to see it run through the global economy for a meaningful period of time.”

That's because Iran has closed the Strait of Hormuz, the narrow mouth of the Persian Gulf, where 20% of the world's oil supply passes through.

It's the largest disruption the oil industry has ever faced, according to Sam Ori, executive director of the University of Chicago's Institute for Climate and Sustainable Growth.

“There's never been anything in the history of the oil market that really is at the same scale as this. You're talking about a fifth of the world's oil supplies being disrupted,” Ori said. “There are some alternative routes, but in the best case, you're still talking about a supply disruption of 10 [million] to 15 million barrels a day.”

He said the U.S. economy is “much different” than it was in the 1970s, when there was an energy crisis.

“We use about a third as much oil per dollar of [gross domestic product] as we did back then,” he said. “The U.S. economy is just a much less oil intense economy compared to what it was.”

Still, any kind of disruption to oil markets, even abroad, will impact prices in the U.S.

“They'll see it at the pump, obviously, but over time, [consumers will] see it in everything being more expensive — any manufactured good that requires energy input. They'll see it in construction costs, anything that we need to build,” Bronson said.

As the Iran war continues, here's how the rising cost of oil could impact Chicagoans.

Fuel costs

As of Tuesday, the average price for regular fuel in Chicago is $4.46 per gallon, up 19% compared to the same time last year . It's also higher compared to the same time last month, when the average price was $3.12 per gallon, according to GasBuddy.

Nationally, the average price for regular fuel is $3.98, the highest so far this year.

“Gasoline prices are what you and I are going to complain about, but at the end of the day, it's the price of diesel that is far more impactful to the broader U.S. economy," Patrick De Haan, head of petroleum analysis at GasBuddy, said. "Everything in this economy moves with diesel.”

Transporting goods

Seventy percent of the oil consumed daily in the U.S. is in the transportation sector, according to Ori. A spike in transportation fuel, like diesel, acts as a hidden tax on deliveries. 

Spot Chief Financial Officer Andrew Krop said fuel rates haven't climbed this high since 2022. The third-party logistics company, which has a Chicago office, largely serves the grocery, food and beverage industry.

Spot's fuel costs, which make up 20% to 25% of operating expenses, have already surged by 40%, compared to last year, Krop said.

The industry has also been dealing with a driver shortage, putting more stress on transportation companies.

He said its trucking clients are "really concerned" and anticipates higher fuel costs will start to be reflected in the price of products sold to consumers.

Michael Mahler, chief operating officer at Chicago Ridge-based HMD Trucking, said rising fuel prices are concerning.

"The escalating fuel prices are having a sizable impact on our company's operations," he said. "Even though we are currently experiencing a slight upcycle of about 5% in freight rates so far this year, the price per gallon has increased by 30% or more over the same period. This is a worrisome trendline."

Transportation, logistics, shipping and farming are fueled by diesel, De Haan said, and it could lead to more inflation for consumers already struggling with the rising expenses.

Airfare

Chicago-based United Airlines sent a letter to staff last week that it would reduce its flight capacity by about 5%, citing jet fuel prices. It would cancel off-peak flights, such as red-eyes, during the second and third quarter of this year, with plans to be at full capacity in the fall.

"The reality is, jet fuel prices have more than doubled in the last three weeks. If prices stayed at this level, it would mean an extra $11 [billion] in annual expense just for jet fuel. For perspective, in United’s best year ever, we made less than $5 [billion]," United CEO Scott Kirby said in his letter. "That may sound scary, but the first piece of good news is that, for now at least, demand remains the strongest we've ever seen. The 10 biggest booked revenue weeks in our history have been the last 10 weeks."

Southwest Airlines, which recently dropped service at O'Hare Airport, declined to comment, saying the impact of fuel costs and its capacity would be discussed when it reports its quarterly earnings next month.

Bronson said airlines are absorbing the costs but soon they'll "have to pass that on to consumers."

Fertilizer and food

Grocery prices in Chicago already have climbed by double digits over the past year, but experts said the Iran war could lead to additional price spikes at the checkout.

That's because petroleum is commonly used in fertilizer. The Green Markets Weekly North America Fertilizer Price Index that charts the price of fertilizer, value-weighted by annual nutrient demand to reflect market trends, showed a 31% increase from the start of the war on Feb. 28 through Mar. 24.

“The number one [impact] will be food prices, due to the price of fertilizer,” Phillip Braun, professor at Northwestern University, said. “It's going to be affected either by higher fertilizer cost or lower [harvests] because of the fertilizer cost."

Bronson said besides increases in fertilizer costs, producers will see costs go up in other areas as well. For example, an orange produced outside the U.S. will cost more because of higher transportation costs. And that will lead either to shoppers paying more for the orange down the line, or to stores not carrying as many , or any, oranges, she said.

Drug prices

Braun said the war’s impact on drug prices will likely be a "slow burn" as most subscriptions are dispensed in 30- to 60-day amounts, and pharmacies will sometimes have a stockpile.

And with insurance coverage set for the year, policyholders will likely be saved — for now — from increased prescription costs.

"[Oil prices are] going to impact the generics, especially because they have very low margins. ... It will directly impact the purchasers of generics,” Braun said.

And some drugs like acetaminophen and cholesterol medications are made from petrochemicals, which are derived from petroleum and natural gas.

“You can see [petroleum] showing up in everything ... to pharmaceuticals to the plastics that go into food containers," Ori said.

Utility bills

While utility bills have been increasing following rate hikes from companies like Peoples Gas, consumers can rest easy knowing the energy crisis shouldn't contribute to higher utility bills.

Ori said the country's natural gas supply is "pretty insulated," unlike places in Europe and Asia.

“It’s a really serious situation in parts of Asia,” Ori said. “There they are going to four-day work weeks. They're implementing bans on air conditioning use.”

Should the Strait of Hormuz open soon, Ori estimates it could take up to several months before consumer prices start to decline, straining an already delicate situation for Americans living paycheck to paycheck.