This post is opinion only. See full disclaimer below.
updated 5-11-26
At this site we try to consider higher level theoretical issues. A few years ago, we were talking about the upcoming problem of inflation way before the usual crowd and we talked about AI’s voracious need for energy also very early on and the accompanying inevitable continued need for oil given the fact that Moore’s law definitely does not apply to energy. But the topic in this post seems so obvious that it’s amazing it isn’t widely understood. When it comes to a potential major oil price spike way above the elevated price we are already at right now, there’s a slow train coming up around the bend.
Now, please take everything I am about to say in this post regarding the risk of another oil spike with a huge grain of salt. I could be totally wrong about the counterfactuals I will present, you’ve been warned, and the Iran war could be over next week, the nuclear material secured, and the Strait of Hormuz could be fully open, and all that attacked oil infrastructure sooner in most cases, though not all, more or less back to normal. That this seems less likely as of the current moment given the failure of Iran to submit a proposal for a peace deal acceptable to the US this week it could, nonetheless, still occur. Unless you are sitting in the situation room regularly at the White House, there are way too many unknowns to know anything even half way for sure. There is also without a doubt, as Trump, Bessent, and Rubio keep pointing out correctly, tremendous economic pressure with the blockade in place on oil revenue that the Iran regime depends upon. The threat of another round of US attacks is also substantial. And China at least in the long run definitely needs the Strait open and the war over given its substantial imports of Iranian oil and will no doubt apply at some point in time its own pressure. All that could lead to a framework and then new nuclear deal with inspections and a full opening of the Strait. That is entirely possible.
That this will all end fairly soon still seems to be what the market overall believes as it continues to fade the war risk to a high degree and stocks continue upwards. The US stock market continues to reach higher highs while Warren Buffet’s equities indicator is way above normal, and he’s still piling in to cash. Oil futures and oil stocks while certainly elevated after this weekend’s failure of a peace deal are still largely staying in a range ready to drop on any hopeful news and remain at nothing like the prices everyone would have thought would be the case if the Strait of Hormuz ever closed. Oil is not at 150 or 200 dollars a barrel at this point as many thought would occur in this scenario.
What I want you to consider here is just what happens if that view is wrong. What if all the conventional market participants are lacking in geopolitical awareness and missing the black swan swimming in the pond so to speak. This is a Weberian site, so we stay neutral politically here, though in our own life we fully support our country and soldiers so please do not take this account the wrong way. This is an analytical not normative account intended to extend the complexity of deeper market discussion.
Let’s for the sake of argument accept most of the premises of the US regime: the Iranians have been overwhelmingly defeated in any conventional terms, several layers of leadership have been wiped out–their air force and navy devastated and their nuclear program turned to dust. The US and Israel have full control over the skies of Iran, and if the US wanted to, they could wipe out their infrastructure and set them back 30 years.
Okay, but if you study war you know that in the earlier US wars in the Middle East the first thing the two oil Presidents from Kennebunkport did is rush to secure the oil chokepoints. Could the US have done that this time? No, not without a ground force and it would have been potentially difficult to completely secure it even then. I’m neutral here, but it is a problem.
You also know that an Afghan Mujahideen armed by the US with handheld American made FIM-92 Stingers was a serious threat to the Russian forces and helicopter power in an earlier Afghanistan war, that IEDs were a huge problem for the US in the Iraq war, and that drones have now been for years the bane of Russian and Ukrainian forces in that war sometimes referred to as the first major “drone war.” Such asymmetric weapons can cause a great many problems.
Now, there was long a debate about the Vietnam War and it went like this: if only the US leaders had been able to fully use air power against Hanoi which the politics made impossible with the political leadership afraid to do so the US could have easily defeated the Vietcong. Perhaps, perhaps not, but it seems like Trump has assumed that argument was at least partially correct. The US has done, I believe, some record number of bombing sorties and they seem to have worked in meeting their military objectives. However, despite all that the problem of the fact that Iran has by some estimates as much as 50 per cent or as recently reported even 70 per cent of its drones and missiles still intact is a big deal. Even if the number is much lower, that those drones can potentially keep the Strait of Hormuz closed and they can continue to attack oil sites in the region for a long time is no small matter.
The key oil chokepoint in the war was in this case saved for last, the exact opposite of what had been done in some examples in the past. Was that a mistake? Not necessarily, it was a different battle plan and objectives, but it is also significant.
I’ve written before about whether Trump is a real-politik hard core leader or Socrates’s “carpenter” who thinks like the carpenter Socrates spoke to that everything was carpentry, but here thinks everything is dollars and cents and deals. I don’t think he is Socrates’s carpenter, but it’s an important question. Time will tell if the economic pressure currently being applied is fully effective and if Trump was sufficiently realistic in his outlook.
Assuming it was not just rhetoric, if it is in fact the case as it seems that Iranian leaders are religious millennial zealots as they are constantly made out to be in the West, why would they put even the harshest economic coercion above their religious belief system and not choose to be martyrs? Or from a real-politik standpoint why would one think that Iranian leadership believing, not incorrectly, that their version of the regime is at risk and that things will, unlike in Venezuela, not work out for them if it fails obviously not choose to fight on every time and reject a peace deal that takes away a lot of any future power. Perhaps, a deal can be made that compromises these points but it will not be easy.
Also, and this is a deep analytical issue I hope was considered: After the Cold War ended, the entire anti-Soviet Washington bureaucracy remained in place despite an obvious lesser need for it. Power in Iran has been defined by its relationship to the nuclear program now for years. Take that away and that part of the power system crumbles. Why would they be willing to do that and give up their nuclear program? So, the nuclear program is, of course, a difficult issue indeed to resolve.
The point is the situation and risk of oil spiking even further is obviously more serious than the spin or many 30 something year old traders of oil seem to think, however it ultimately works out. That’s all I’m saying theoretically. Again, maybe it’s all over in a week, but it behooves any serious market participant to consider the counterfactuals. That’s not unpatriotic just in Weberian terms realistic. Narrative does not win wars or in this case because clearly the US has perhaps in a conventional sense won, successfully end them with the desired resolution.
Now let’s go a little deeper into the issues here: First, as long as Iran has the recoverable nuclear material they can possibly still at least make a primitive nuclear bomb. But a primitive nuclear bomb like Hiroshima is still a super big deal. Can they do that with the current grade of 60 per cent enrichment—it’s been reported as a possibility, but only higher level people in that field with big time clearances really know not a journalist somewhere. Even a dirty bomb though is super-serious. Maybe if they try to get the enriched uranium from a site and further enrich it up to full 90 per cent weapons grade or use it the US will simply attack the attempt and that will work. You see accounts though that the IAEA does not know for sure where the material is or if it’s accessible to the Iranians and still hidden away somewhere. Hopefully the people in power in the US know. In any case the goal is to get the nuclear material, get inspectors in again, etc. Could a deal occur? Yes, but it will require such an agreement by Iran. There is no indication, yet, the Iranians will do that so if that turns out not to work we are back to the need for a ground operation to remove the uranium, a renewed air campaign to dissuade them or this drags on.
Second, everyone is excited at the idea of the Strait opening through US escorts. But here is the thing, even if it opens with a contingent of American and perhaps allied escorts like the French who have moved an aircraft carrier into theater and South Koreans who desperately need the oil, the through put rate to successfully get ships through the Strait under cover while drone attacks remain possible is a still too low for the necessary oil to get through at least short to medium term. It’s been done before and it’s a slow and laborious process not the incredible flows of vessels of the prior pre-war era even if it works. Of the 20 million barrels a day that was getting through before the war now the number may be down by as much as 12 million according to some estimates. Even with more than 5 million barrels a day making it out the Red sea this is a huge unmaintainable shortfall. Assume say 60 per cent throughput with escorts and you are still left with over an unsustainable 5 million barrels a day short fall which is huge. Oil came down last week on one container ship under escort getting through, good for it, but that’s not a fundamental change. Only a full opening of the Strait really solves the problem.
Third, the clock is ticking on Iran having to shut down its own production and potentially losing some per cent of future production as the fields get damaged by that shutdown if the blockade continues for only a while longer and there’s nowhere for the oil to go. How much longer is debated–it might be weeks or months. Economically that’s a big deal to be sure, but as suggested above given their religious fanaticism who says they will prioritize that fact. But if they don’t make a deal before that and say 50 per cent of their production, a number regularly mentioned, is permanently lost from the shutdown which partially destroys the fields –that is itself a huge problem for oil markets. It’s a lot of production going permanently off line.
Also, Iran could not have thought for a moment they could survive the might of the US in conventional terms. But for 47 years they planned out the response they seem to be putting in place. Thus, it may be wrong to assume there’s no strategy there on their part long gamed out even though their leadership has been decimated . Iran may lose, but its not completely hit or miss and that strategy has to be overcome by the US. One of the keys of their plan obviously is to send the oil price to a number so high that the US has to give in. It seems unlikely Trump would fully retreat whatever oil went to, but this plan must be fully taken into account by markets.
Fourth, damage has already been done to production throughout the Middle East. For example, as much as 25 per cent of Qatar’s natural gas production was damaged. Natural gas production with Qatar gas off line with the Strait closure may be as much as 40 per-cent lower for the world this year. The worst hit production areas, Qatar has warned, could take 3-5 years to fully repair after hostilities end. Other oil facilities throughout the region have also been damaged. All of which is to say simply that business as usual if it occurs won’t necessarily be fully business as usual in some instances for at least a while.
Fifth, here is the really big problem, will the flows return through the Strait if Iran continues to have the ability to attack ships there. Without insurance and supposedly some big insurers have already made it a no go zone at any price will someone with a 100s of millions of dollars tanker risk it. I don’t know, but it’s a key counterfactual indeed. Obviously, a peace deal could quickly reverse this problem but simply a temporary ceasefire does not.
Sixth, and perhaps most importantly, if the US escalates to deescalate Iran has already telegraphed that they will attack oil infrastructure thru out the Middle East and in fact are already beginning to do so, attacking the UAE repeatedly along with Qatar and Saudi Arabia in the last two weeks and supposedly hitting at least one key oil loading dock. What happens to oil if the Iranians activate the Houthis fully something that has reportedly already begun with Somalians backed by the Houthis seizing ships in the Red Sea—but in a even more extreme way. Or if they hit Saudi production successfully. The probability of at least Iranian attempts of this sort is no small number.
Now let’s be clear, the theoretical problems I’m raising are not that all these various issues can’t potentially be overcome by the US. Perhaps they can. A deal may be made, the question is, of course, when and how soon and what happens if no such lasting deal occurs. The problem is the clock is ticking and a slow train is coming in the oil markets. As of right now the 30 something. year olds and macro-tourists at trading desks around the world are, as I suggested above, mostly fading all of this and the paper price has become disconnected from the real oil price. They are assuming this ends okay and does so fairly quickly. They may end up being right, but one wonders how seriously they are taking the key counterfactuals. Now the US can win even spectacularly, but if it’s not quickly a lot of things may possibly kick in as paper shifts to real within the oil markets over the coming summer.
A perfect example of this is South Korea which gets something like a huge 70 per cent of its oil from the Middle East and has maybe a matter of weeks or a month or maybe several months depending on who you ask before the country literally starts to potentially run out of oil. The Kospi is acting like this will not happen, though, as it recently ignored all of this and zoomed once again upwards. However, it seems like the trade is into the AI names that are seen as partially sheltered from all of this. South Korea starting up the nuclear reactors by the end of the month if it succeeds keeps the lights on and is a brilliant plan but it does not keep the fuel going–so to an extent South Korea is the proverbial canary in the coal-mine.
The obvious negative counterfactuals to consider in this case are whether diesel shortages for trucks and a shortage of helium, usually sourced from the Middle East, could have an effect on the chips in that country. Without Nahptha also often sourced from the Middle East, how are manufactured goods even going to be packaged? More broadly, what happens to South Korea’s overall economy if they have to heavily ration oil.
The European markets are just starting, it seems, to register that oil shortages could be coming and it will affect their economies and cause at least stagflation. There is much talk on trading desks no doubt that demand destruction will somehow naturally keep a lid on oil prices if this happens, but one has to ask what happens as oil goes from paper to real and the world is fighting over a limited supply, demand destruction or not.
I have suggested elsewhere that a friend of mine who’s very knowledgeable about real politik suggested that maybe Trump is so hardcore that he actually wants to use an elevated oil price to do to China what a super low oil price did in an earlier era to the Soviet Union. I’m not at all convinced of that, but it is an interesting possibility. In the very least, all of this greatly increases the economic costs of production for China and actually all of Asia. There is no question that the big winners comparatively if this continues are the oil rich countries of North and South America–the US oil industry and countries like Brazil, Argentina, etc. that become the key strategic sources of the world’s much needed oil. Will this all get fixed in time before a 30 something year old trader is faced with the difference between a number on a screen and real physical oil—I don’t know. However this plays out, at least have a reality principle about all of this and some of its more complex aspects. Will Trump, Rubio and Bessent solve this problem of Hormuz? Is it solvable? They all are certainly talented and understand markets and power, so they could succeed. My only point is that you need to know at a higher level that the clock is ticking, and there is a slow train coming….
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