There is an old military phrase that ‘no plan survives first contact with the enemy’, and it seems that Iran missed the memo on how it was meant to respond to the latest attacks on it by the U.S. and Israel. These, and the earlier attacks last year in the same vein, can be seen as an extension of the war effectively launched by Iran via its proxy Hamas’s murderous attacks of 7 October 2023 on Israel. In any event, wildcard factors are now in play that threaten sustained upheaval across the Middle East for years to come, and elevated oil, gas, and gasoline prices alongside that. Iran’s new leader (largely a genetic copy of the previous one) has encouraged one such thread with the continued de facto blockade of the Strait of Hormuz, through which up to a third of the world’s oil is transported and about a fifth of its liquefied natural gas (LNG). At around the same time, the — still, Islamic Republic — of Iran said the world should be ready for oil at $200 a barrel as its forces hit merchant ships. So, is this likely?
Dealing with the key problem itself — an effectively closed Strait of Hormuz — looks impossible at this stage of the conflict, given the operational parameters within which U.S. President Donald Trump wants his military to work. “He does not want to put men on the ground around the Strait, which would be the only realistic option to try to ensure safe passage for ships,” a senior Washington-based source who works closely with the U.S. Treasury Department exclusively told OilPrice.com last week. “Without that, deploying navy ships to escort merchant ships through the Strait would still be subject to drones and missiles launched from elsewhere in Iran, and to the IRGC’s [Islamic Revolutionary Guard Corps] fast attack boats, and even before that, the U.S. Navy would have to de-mine the area now as well,” he added. As it stands, the Trump administration has said that it is working on a plan to secure the Strait — including the U.S. Development Finance Corporation providing insurance for ships — but no definitive proposal has yet emerged, nor any timeline for this.
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In the absence of restoring this key transit route for global oil supplies, the onus will increasingly fall on increasing supplies into the market from elsewhere. Several solutions are being implemented to this effect, just as they were in the early aftermath of Russia’s 2022 invasion of Ukraine, as thoroughly detailed in my latest book on the new global oil market order. Back then, Brent crude rose to over $120 a barrel — a level it has again approached following the recent U.S. and Israeli attacks on Iran. One of the more effective strategies back in 2022 was freeing up barrels from the strategic petroleum reserves of member countries of the International Energy Agency (IEA). The agency last week recommended releasing 400 million barrels from these, dwarfing the five previous collective releases, the largest of which was 180 million barrels across two tranches in 2022. U.S. Energy Secretary Chris Wright has now said that Trump has authorised the release of 172 million barrels from the U.S. Strategic Petroleum Reserve, beginning this coming week. The problem is that several IEA countries are unable to free up such reserves at short notice, with the full quota of extra oil available likely to take up to 120 days to come into the market.
Another mechanism to effectively increase global oil supply is to grant temporary waivers for countries to use energy from sanctioned countries. Back in 2022, this policy was applied to oil from then-sanctioned Venezuela, and a blind eye was turned on oil from sanctioned Iran as well. Following the U.S.-led removal of Nicolás Maduro as President on 3 January, Venezuelan oil can be used freely as far as the U.S. is concerned, although volumes remain low after years of oil sector neglect. Now, it is Russia that will be the prime beneficiary, with the U.S. Treasury issuing a temporary 30-day waiver (expiring 11 April 2026) for countries to buy sanctioned Russian oil, including India. Russia has also indicated that it is willing to resume natural gas and LNG exports to countries that have been hit by the Iran conflict, including those reliant on Qatari LNG. That said, even these increased volumes from Russia will not compensate for continued supply losses from the Strait of Hormuz.
Given the ongoing seesawing in the conflict, it is impossible to know precisely how much oil supply will be lost on a steady basis. However, a guide to the price implications of various levels of oil supply loss was quantified a while back by the World Bank. It said that a ‘small disruption’ in global oil supply – reduced by 500,000 to 2 million bpd (roughly the same as the decrease seen during the Libyan civil war in 2011) – would see the oil price initially rise 3-13%. The Brent crude oil price was trading around $73 a barrel before the latest U.S. and Israeli attacks on Iran began; so on this basis, to about $75-82 a barrel. A ‘medium disruption’ – involving a 3 million to 5 million bpd loss of supply (roughly equivalent to the Iraq war in 2003) would drive the oil price up by 21-35%; so around $88-98 a barrel. And a ‘large disruption’ – featuring a supply fall of 6 million to 8 million bpd (like the drop seen in the 1973 Oil Crisis) – would push the oil price up 56-75%; so around $113-127 a barrel. The World Bank did not specifically factor in the effective closure of the Strait of Hormuz in its projections, but Houston-based Vikas Dwivedi, global energy strategist at Macquarie Group, sees this as creating a domino effect of events that could push crude to $150 a barrel or higher. As he told OilPrice.com last week: “We think about the conflict and the closure around the Strait of Hormuz as an impulse function on pricing, meaning the reduced transit is creating the action and will require numerous policy, military, and logistical responses to mitigate the upward price move which we believe could reach $150 per barrel along the path.”
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The key point here for Trump is what these figures mean for the U.S. economy and for his — and his party’s chances — at the 3 November mid-term elections and the later Presidential elections. As fully analysed in my latest book on the new global oil market order, historical data highlights that every US$10 pb change in the oil price results in around a 25-30 cent change in the price of a gallon of gasoline, and for every 1 cent that the average price per gallon of gasoline rises, more than US$1 billion or so per year in consumer spending is lost. Politically speaking, since 1896 the sitting U.S. president has won re-election 11 times out of 11 if the economy was not in recession within two years of an upcoming election. However, sitting U.S. presidents who went into a re-election campaign with the economy in recession won only once out of seven occasions. The same pattern broadly applies to the re-election chances of candidates of any sitting president’s party in U.S. mid-term elections as well. Trump may still seek another term as President, but even if he does not, his Republican Party will want to optimise their chances for another of their members to be in the top job, which means keeping gasoline prices — and therefore, oil prices — at the low end.
One thing President Trump is always acutely aware of, the Washington source told OilPrice.com recently, is that he does not want the U.S. drawn into a long, unwinnable conflict like Russia in Ukraine. “He famously pledged an ‘end to endless wars’ [in his commencement address to the United States Military Academy at West Point on 13 June 2020, detailed in my latest book], and that was a vote winner in his electoral base, and he’s loyal to them,” he said. “He can justify a short conflict on the basis that it is in America’s national interests, but anything more than a few weeks, and he knows he’ll be in trouble with that [voting] bloc,” he added. A senior source in the European Union’s security complex exclusively told OilPrice.com: “He [Trump] laid out four clear objectives for the attacks on Iran at the beginning, and we believe he will say in the coming two or three weeks that he has broadly achieved all of them — and that he will monitor the nuclear programme, missiles, and proxies on an ongoing basis, and will react again if he sees any danger there for the U.S. — and then he’ll pull out.”
By Simon Watkins for Oilprice.com
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