• Treasury Secretary Scott Bessent expects oil prices to ease once the U.S.-Iran conflict and Strait of Hormuz disruptions de-escalate.
  • However, renewed U.S. strikes on Iran's Larak Island and Iranian retaliation pushed Brent above $91 and WTI above $86 on August 31.
  • The administration plans weekly secondary sanctions on Iran, adding financial pressure while markets price in supply risks.

A Volatile Market

Oil prices are swinging wildly as the U.S.-Iran conflict enters its sixth month. Treasury Secretary Scott Bessent expressed confidence that prices will eventually come down, but the immediate trend is upward. Brent crude surged 3.58% to $91.25 per barrel, and WTI jumped 3.55% to $86.36 in early trading on August 31, following fresh U.S. strikes on Iran's Larak Island and reported Iranian retaliation.

Bessent's comments reflect the administration's view that the current oil-price shock is temporary. He told Reuters (TRI) that the U.S. is likely to impose new secondary sanctions on Iran each week, targeting third-country banks, traders, insurers, and buyers. This strategy aims to force Iran to reopen or normalize transit through the Strait of Hormuz, a critical chokepoint for global oil supplies.

Sanctions vs. Military Action

The policy approach has shifted from large-scale military escalation to what the White House calls "economic D-Day." This was evident last week when oil prices fell sharply on August 25 as investors saw the U.S. turn toward sanctions. Brent settled down 3.9% at $88.58, and WTI lost 3.1% to $82.36. However, fresh attacks reversed much of that relief.

The conflict has severely curtailed shipments through Hormuz, with Reuters estimating August oil exports through the strait at just 2.2 million barrels per day. Before the conflict, Brent traded around $72 per barrel; it later exceeded $125 at its wartime peak and was near $90 late last week. Prices remain about 25% above prewar levels.

Downstream Squeeze

While crude prices are the headline, downstream costs are hitting consumers and businesses harder. Refining margins have blown out, with U.S. diesel crack spreads exceeding $100 per barrel in mid-August, according to Columbia's Center on Global Energy Policy. This means higher diesel, gasoline, and jet fuel prices, squeezing households and industries reliant on transport.

The U.S. national average gasoline price hit $4.10 per gallon on August 20, and higher diesel costs raise the price of moving food, raw materials, and finished goods. Airlines, logistics companies, and trucking fleets are particularly exposed to these input cost increases.

Economic Implications

The oil-market structure remains in backwardation—near-term contracts priced above later delivery—which signals traders expect some eventual easing, consistent with Bessent's claim. But it's not a guarantee. Import-dependent economies in Asia and Europe are more exposed to a prolonged energy-price shock, which complicates central banks' efforts to lower inflation.

Higher oil prices have improved profits for major U.S. producers, but prolonged regional disruption could undermine capital projects and future output growth for companies with Middle East exposure. Shipping, insurance, and commodity-trading firms face rerouting costs, higher freight rates, and war-risk premiums.

Political and Diplomatic Landscape

The conflict remains unresolved, and the military incidents of August 30-31 show that sanctions haven't removed the risk of direct confrontation. Reports that Washington was not prepared to return to prior memorandum-of-understanding terms added to market concern last week. Secondary sanctions could create friction with countries and firms that buy Iranian oil or provide services linked to Iranian trade.

The situation is reminiscent of past oil shocks: the 1973-74 embargo, the Iran-Iraq "Tanker War" in the 1980s, and the 2022 energy crisis following Russia's invasion of Ukraine. This time, the chokepoint itself is central to the disruption, with Reuters describing it as the largest oil-supply crisis on record.

Outlook

Short term, oil prices will remain highly sensitive to military actions and any credible agreement to expand Hormuz passage. Medium term, a genuine reopening of transit could reduce the geopolitical risk premium and support Bessent's forecast of lower prices. But physical normalization would take time: vessels would need to return, cargo patterns reset, inventories rebuilt.

Long term, if the conflict becomes entrenched, the world could see persistently higher energy costs, increased investment in non-Gulf supply, and faster adoption of electrification and energy efficiency. Reuters suggests the stalemate could persist into 2027, keeping inflation and energy-security risks elevated.

The central uncertainty is not whether oil can eventually fall—it can—but whether diplomacy and secure shipping arrangements arrive before another round of disruption produces a more lasting shock. For now, Bessent's optimism stands in stark contrast to the market's immediate reaction.