For two months, the economic narrative about the Iran war boiled down to this: Oil and gas prices are really high, exacerbating an affordability problem that could send America’s economy into the toilet.

No doubt prices are high, increasing the risk of a recession. But there’s a key problem with that story: Prices aren’t as high as they should be, considering the historic destruction of the world’s oil supply.

In 2022: When Russia attacked Ukraine, it threatened to take 3 million barrels offline (but never did). Oil soared above $120 a barrel and gas surged to $5 a gallon.

Today: When Iran shut down the Strait of Hormuz , it took 14 million barrels offline immediately – the biggest supply disruption in history. But oil is trading around $110. Gas is at $4.39.

Oil was supposed to be at $150 by now, according to analysts’ expectations at the outset of the war. Some more aggressive forecasts predicted oil could rise even higher.

“I would have expected prices to be above $200. It’s crazy,” said Matt Smith, lead oil analyst at Kpler. “Everyone is scratching their heads about this.”

What’s going on here?

Ignore your Econ 101 class for now: Supply and demand can only explain so much.

The math doesn’t math. Something else is happening.

The sun rises behind a tanker anchored in the Strait of Hormuz off the coast of Qeshm Island, Iran. Asghar Besharati/AP

Supply and demand

Let’s go through the possible explanations.

1) The world is pumping more oil.

Crude output in the United States, Latin America and other regions outside the Persian Gulf have grown – by historic levels, in the case of the United States. But they can only increase production so much, and the extra amount they’re pumping is not nearly enough to make up for the 14 million barrel per day shortage.

The two countries most able to ramp up production are Saudi Arabia and the UAE, and they can’t dramatically increase exports now because of the strait closure. And global refineries that turn the oil into useful fuels like gasoline are operating at or near maximum capacity (if they haven’t been destroyed in the war).

So this is an easy one to dismiss: This is not an increased production story.

2) There’s just a lot of oil out there.

A remarkable amount of crude – 580 million barrels worth, according to JPMorgan – had been sitting on oil tankers and in onshore warehouses before the war. That storage has created a significant supply buffer.

“Remember: Prior to the war, the oil market was in general oversupply,” said Joe Brusuelas, chief economist at RSM US. “Sometimes it’s better to be lucky than good.”

A pumpjack stands idle in the Huntington Beach oil field. Mario Tama/Getty Images

The historic release of oil from strategic reserves and the Trump administration’s de-sanctioning of Russian and Iranian oil added a few hundred million extra barrels to the supply chain, giving the market some additional, albeit temporary, relief.

Even still, all of that combined is plugging the supply gap by only about 8 million barrels a day, according to Natasha Kaneva, head of global commodities strategy at JPMorgan.

3) Demand for oil is falling.

Demand has also fallen – by at least 4.3 million barrels per day, according to JPMorgan. By contrast, demand destruction during the global financial crisis in 2009 was just 2.5 million barrels per day, even after oil rose above $140 a barrel.

Some consumers are changing their behavior and buying less fuel because of high costs. But prices just aren’t high enough to account for all that demand destruction.

One explanation: Oil supply has fallen off so rapidly that it’s showing up on the demand side of the leger. Some parts of the world – the Middle East and Asia in particular – are literally running out of oil and fuel.

Europe is warning about imminent shortages of jet fuel. Shortages of feedstocks for plastics have forced Asian countries to cut back on production or shut down factories altogether. Consumption of LPG, a key cooking fuel in India, has fallen 13%, according to JPMorgan.

They can’t demand it if they literally can’t get it. When demand falls, prices sink with it.

Employees work at an assembly line producing car smartphone holders in Dongguan, China. Go Nakamura/Reuters

The Trump effect

With just 8 million barrels of supply and 4 million barrels of demand destruction, we’re still not back to replacing the 14 million barrels per day we’ve lost because of the strait lockdown.

So oil should be much higher. Why isn’t it?

Speculation.

The bulk of oil futures trading is made up of hedgers who buy contracts for the future delivery of crude. But about 11% of open interest crude contracts are bought and sold by speculative traders who were neither interested in taking possession of physical oil or providing short-term liquidity to the market, according to an academic paper published in the International Journal of Political Economy in 2023.

Those trades have outsized influence in the market, and today they are betting President Donald Trump will get out of Iran quickly, keeping a lid on oil prices.

“I think the White House has been very successful in convincing a corner of the market that the war will be over soon,” said Helima Croft, global head of commodity strategy at RBC Capital Market and a former CIA analyst.

Why prices could rise

So far, the United States has proven remarkably insulated from the supply shortages happening around the world. At $4.30, gas prices are high but not as bad as we’ve seen, and even low-income drivers have proven more or less willing to keep up their normal habits, according to Bank of America.

The sun sets beyond a gas station near the Pacific Ocean in El Segundo, California. Mario Tama/Getty Images

But the inventories that have worked like shock absorbers are dwindling, and fast. US crude oil inventories unexpectedly plunged by 6.2 million barrels last week, according to the Energy Information Administration. Stockpiles of gasoline and distillates such as diesel fell sharply, too. The excess supply buffers that have supported the market only have a few months left before they break, said Hussain.

Although gas prices rely far less on Middle Eastern oil than plastics and other distillates like jet fuel, crude oil remains the biggest input, and that’s starting to rise steadily again – up 20% in less than two weeks.

Refinery constraints will hurt, too, as we get into the summer. And shortages in other parts of the world will inevitably hit the United States, albeit with a delay.

“One thing for certain is there is a global supply crunch coming, and it’s not being fully priced in,” said Smith.

CNN’s Matt Egan contributed to this report.