Global oil demand is falling, and crude prices are down. But here’s why gasoline, diesel and other refined products are still costly

Global oil demand is set to decline this year for the first time since the height of the COVID-19 pandemic in 2020, according to a report from the International Energy Agency.

The drop, which the agency expects to amount to about 1 million barrels per day in 2026, is due to higher oil prices and disruptions to physical supply that weighed heavily, but unevenly, on various parts of the world, the report said.

The supply disruptions were caused by the war between the U.S. and Iran, which left ships loaded with crude oil stranded in the Persian Gulf for more than three months, unable to safely travel through the Strait of Hormuz, a major route for oil and gas shipments.

“The future of Hormuz is probably more uncertain today than it was at the beginning of the war,” said Jim Burkhard, vice president and head of crude oil research at S&P Global Energy.

Burkhard said Iran is still trying to control the strait, while the U.S. has not been able to fully restore normal operations, making a return to prewar conditions unlikely.

Global oil demand averaged just 97.9 million barrels per day in May, down 5.3 million barrels per day from a year earlier. Much of the decline was in Asia, which relies heavily on oil from the Middle East.

China’s decrease of 1.5 million barrels per day, representing a 9% decline, was by far the largest globally, the report said.

But the main exception to the global slump in oil usage was in the U.S., where gasoline use increased in the second quarter of 2026, despite the fact that pump prices were about 50% above their prewar levels in May, the report said.

China decided to massively cut down on purchasing oil from the global market as the price rose during the spring, reducing its consumption by almost 6 million barrels per day, Burkhard said.

“What China said is, ‘You know what, prices are high, there’s a crisis. We have this huge inventory stock, we can sustain demand. We’re just going to cut by 50% the amount of crude oil we buy,’” Burkhard said.

One way China cut back its consumption was to temporarily stop filling up its strategic petroleum reserve, which it had been adding to at a rate of nearly 1 million barrels per day, said Daniel Sternoff, senior fellow at the Center on Global Energy Policy at Columbia University.

The crisis also accelerated China’s saving of road transportation fuels as its use of electric vehicles grew, he said. “What we’re tracking so far, at least since the crisis began, is China is probably on track to see somewhere between 500,000 and 600,000 barrels per day worth of demand losses for gasoline and diesel. So that’s pretty significant,” Sternoff said.

A fragile ceasefire enabled some ships to exit through the Strait of Hormuz in June, which allowed more oil on the market. That led to lower oil prices.

But even after tensions escalated between the U.S. and Iran earlier this month, prices didn’t spike.

“This gray zone conflict that the U.S. and Iran are in, it’s not really a shock to the oil market,” Burkhard said. “It can push prices up and down a few dollars like it did the other day, but it’s not the same shock that it was in early March when Iran did what many thought was unthinkable.”

Another reason oil prices didn’t spike very high after recent military strikes is that there were fewer buyers available to scoop up the supply that had become available, experts said.

On top of China dramatically reducing consumption, several refineries in Russia were unable to process crude after being damaged in drone hits from Ukraine, and refineries in the Middle East remained damaged from the war, Burkhard said. As a result, prices for gasoline, diesel and other refined products have stayed inflated longer than oil prices, he said.

“There’s this gush of supply of crude oil being made available to the market, and there’s simply less demand for that crude oil,” Burkhard said.

Gasoline prices surpassed $4.50 on average for a gallon of regular in the U.S. in May, rising more than 50% since the start of the war, according to AAA data. But that didn’t stop drivers from hitting the road; in fact, gasoline consumption rose in the U.S. during the second quarter of the year.

One reason may be because the percentage of household income spent on gasoline in the U.S. has been declining for years, Sternoff said. Plus, many people have been transitioning from remote work to in-office jobs, he added.

“Even though it’s a really political price that people pay a lot of attention to, if you are in the higher quintiles of income in the U.S., you might grumble about it, but you’re not really driving less just because of that increase in prices,” Sternoff said.