Iran, Energy, and the Economy: The Impact of Trump's War
by David Bernell and Ambassador Thomas Graham (Retired)
The war in Iran that the United States and Israel launched may have the effect over time of upending politics in Iran. It may also significantly shake up relations among countries throughout the region and well beyond the Middle East. These developments will take some time to unfold. On the other hand, what has already begun within only two weeks is upheaval in the global economy, as energy supplies are being cut off and prices are rapidly rising.
The world relies heavily on both oil and natural gas from the Middle East, and most of those resources – from energy producing countries like Saudi Arabia, Iraq, Kuwait, Qatar, the United Arab Emirates (UAE), and Iran – are shipped through the Persian Gulf. What’s more, there is a choke point in the Gulf on the southern coast of Iran called the Strait of Hormuz.
Photo: Nations Online
The strait is only 24 miles wide at its narrowest, but the ships moving through it travel in corridors only two miles wide. This makes the strait a vital waterway for the global economy.
Massive Supply and Insatiable Demand
A few numbers can put this importance in perspective. Petroleum is delivered in tankers, the largest of which can hold over two million barrels (a barrel is the equivalent of 42 gallons, and while oil hasn’t been shipped in barrels for over a century, it is still measured and priced in barrels, thus the term continues to be used). There are 60-70 oil tankers of different sizes that move through the strait each day, and in total they account for about 21 million barrels, which is 20 percent of the world’s oil consumption of 106 million barrels per day.
This amount of oil powers a lot of the global economy. The entire European Union – 27 countries – only uses 10.5 million barrels a day. The United States, by contrast, is huge consumer, using 20 million barrels a day on its own, about the same amount of oil coming out of the Persian Gulf. However, the United States is the largest producer of oil in the world, so very little of the oil it uses comes from the Middle East. Most of the oil from the Persian Gulf goes to Asian countries.
When it comes to natural gas, the Strait of Hormuz is also very important, but before getting into the numbers, we’ll take a little detour here to explain something.
Most of the world’s natural gas (about 85 percent) is shipped as a gas in a network of pipelines that cross continents and link producers to consumers. Those pipelines can go all the way to your home, where you might see that natural gas coming out of the burner on your stove cooking your dinner. Gas pipelines, however, do not cross oceans. But it is possible to transport natural gas by sea in the form of liquefied natural gas, or LNG (the technology has been in use since the 1960’s, but its use did not grow rapidly until the 2010’s). The gas is cooled to a temperature of negative 260 degrees Fahrenheit in order to liquify it. Then it is loaded onto tankers that can keep it cold. At the other end of the voyage, the LNG is offloaded and warmed up to make it a gas again. Then it’s sent along to its destination via a pipeline. This allows natural gas to be shipped anywhere in the world.
One more thing, as every industry has its own jargon, a common measurement for natural gas is “billions of cubic feet per day,” which is written as “Bcf/d.” This isn’t a measurement that regular people tend to use, so for some perspective, a billion cubic feet of water would be enough to fill a big American football stadium (like AT&T Stadium in Dallas)…10 times.
Back to the Middle East. The market for LNG has grown quickly, and Qatar is one of the world’s largest producers of LNG. The tankers that transport it, along with LNG from the United Arab Emirates, go through the Strait of Hormuz. These two countries account for about 20 percent of the daily production of LNG in the world (not all natural gas, just LNG). In short:
(For those of you doing the math, the total of all natural gas produced in the world would fill that football stadium about 4,000 times, every day.)
In total, roughly 20 percent of the world’s total supply of both petroleum and LNG go through the Strait of Hormuz every day, or at least they did until two weeks ago. Now there is very little energy going through the strait, and Qatar has entirely shut down its production of LNG in response to the war.
There have been energy shortages and price spikes in the past. There was even a major oil embargo in 1973, which caused oil prices to quadruple in only a few months, and this crisis had longstanding consequences that changed global politics and economics. Energy shocks are not new. What is unusual about the current situation is that the Strait of Hormuz has never before been cut off like this. The International Energy Agency said last week that the war in the Middle East is “creating the largest supply disruption in the history of the global oil market.” In a time when global energy consumption is higher than ever, when more countries around the world have achieved remarkable economic growth and therefore have a significant stake in the supply of energy from the Middle East, this is unprecedented. The world’s largest hub for energy exports is effectively closed for business.
It is well known that when there is a shortage of a product, or even an expected shortage, the price of that product goes up as long as the demand for it remains the same. And the demand for oil and gas will not be reduced nearly as much as the supply is being cut off. Prior to the beginning of the war and the US military buildup in the region, oil was selling for about $60 a barrel. Today it is selling at over $100 a barrel, an increase of almost 70 percent. The price of LNG has gone up even more, with an 80 percent increase in price in Asian LNG markets (where most of the LNG from the Persian Gulf is sold), from $10 to $18 per Bcf.
This is wreaking havoc upon the global economy, and it will only get worse as long as the war goes on.
If you filled the tank in your car recently, you’ve already seen the impact of the war on your personal finances, as the amount you paid at the pump has gone up by a big amount in a short time. These price increases will impact every form of transportation, so the cost of shipping goods on planes and ships and trucks to your home, the grocery store, Costco, anywhere, is going up, and this increase the price of all those products being purchased. What’s more, if the war continues, everything that uses oil and petrochemicals in manufacturing will go up in price, and this includes a huge range of products such as plastics, batteries, detergents, eyeglasses, phones, and thousands of other items – you probably cannot go ten minutes without encountering a product made with petroleum.
Iran’s Leverage…
The government of Iran knew all this would happen, and has ensured it. As soon as the Americans and Israelis began their airstrikes, the Iranian government stated in clear terms that they would stop the flow of oil and natural gas in the Persian Gulf. And they’ve done it. It turns out that Iran can disrupt the global economy pretty easily and inexpensively. Analysts in and out of the US government and all over the world have known this for decades. The Strait of Hormuz is so narrow that it’s simple for Iran to shut it down. Iran cannot win in direct confrontation against the US and Israeli militaries, but it can engage in asymmetrical warfare to inflict harm. Geography and a “home field advantage” work in Iran’s favor.
There are many sites on the Iranian coastline where Iran has placed a battery of mobile missile launchers and anti-ship missiles that can be easy to move. While the Iranian military has used these assets, they have been degraded by the airstrikes. Iran can also utilize the naval mines it has stockpiled for this very scenario, and it is doing so. These are cheap, easy to deploy, difficult to detect, and dangerous to clear. These can be very effective in closing the strait. Iran also has a large number of small, fast attack boats that can strike the big, slow tankers moving through the strait (and lay down mines). A small swarm of boats can hit targets fast and then quickly disperse to reach safe havens on the Iranian coastline. And of course, Iran has drones, which it has been providing to Russia in its war with Ukraine, and which have proven their destructive capabilities. To that end, Iran has several options that are plentiful, usable, cheap, elusive, and deadly.
Moreover, Iran doesn’t have to attack every ship passing through the strait, or even a lot of them. It only needs to cause fear by making threats and striking a few ships (not even sinking them), to give everyone a sample of what could befall their ships and their oil and natural gas. Iran has already attacked 18 ships in the Gulf, and even before it did this, traffic was coming to a standstill. Insurance companies are refusing to cover ships sailing through the strait. Crews are reluctant to take the risk of making the crossing. And shipping companies are suspending planned operations.
Due to the extensive leverage the Iranians have in the Strait of Hormuz and thus over much of the world’s energy supplies, the United States never been willing in the past to wage war directly against the Iranian regime. Iran’s ability to hold the global economy hostage by threatening it with a cutoff of oil and natural gas was a form of deterrence that prevented American military action.
…and Trump’s Folly in Ignoring It
The very circumstance predicted and avoided for so many years has come to pass, and it is because the Trump administration dismissed these considerations. The president seems to have thought that he could be immune from these adverse consequences. Of course, the Trump administration’s decision making has been coming under intense scrutiny and criticism.
As one report characterized the situation, the consideration of economic analysis in the lead up to the war was secondary. “Trump’s preference of leaning on a tight circle of close advisers in his national security decision making had the effect of sidelining interagency debate over the potential economic fallout if Iran were to respond to US-Israeli strikes by closing the strait.” The result was a failure to anticipate that Iran would respond in any way it could to the American and Israeli strikes.
Former Defense Secretary James Mattis, who served in the first Trump administration (and prior to that had been a General in the US Marine Corps), has been known for pointing out that once hostilities begin, “the enemy gets a vote.” In other words, no matter how well the United States executes its military operations, “the impact depends on how the adversary responds, and not just on what the United States has done.” By considering American power and capabilities, while dismissing what Iran was capable of, the Trump administration has now blundered into causing a severe blow to the global economy.
Donald Trump has tried to deflect or ignore the well-deserved criticism coming his way. He has argued that:
The problem of higher prices isn’t so bad. “If they rise, they rise,” Trump said. This is simply denying the problem, not the problem of rising energy prices, but people’s reaction to them.
The United States is better off from high energy prices since it is the world’s largest oil and natural gas producer. This suggests that the financial windfall to a handful of American energy companies offsets all the losses to hundreds of millions of individuals in the country, as well as companies not in the oil and gas business.
The closure of the Strait of Hormuz is a problem, but it is the responsibility of other countries to reopen it. Trump has called on countries that purchase a lot of oil from the Persian Gulf -- China, Britain, France, Japan and South Korea – to send ships to the region, restart the flow of oil, and police the Strait of Hormuz. Trump won’t go so far as to say that even though he created the problem, he wants others to clean up the mess. However, this is an acknowledgement that the American military cannot do everything Trump has claimed, and that naval escorts of tankers are so dangerous that the US military will not conduct them.
Political Fallout – Domestic and International
The impact of war in Iran and high energy prices may have the effect of costing Trump politically at home. One thing that is easy to see is the price of gasoline. It’s posted at gas stations on streets all over the country and all over the world. Voters, citizens, taxpayers – however you characterize a population – sees this number frequently, and it’s not hard to understand cause and effect in this case. To the extent that a president who campaigned on bringing prices down and staying out of war is doing exactly the opposite of what he promised, there may be a political price to pay. The Democratic party is certainly going to make this central to its messaging in the 2026 midterm elections.
The war is also demonstrating, once again, that the United States will charge ahead in pursuing whatever policy Donald Trump wants on any given day without consideration of the impacts on other problems, objectives, or countries. In spite of the fact that many countries have little love for the Iranian regime, Trump is proving, once again, that the United States cannot be counted on as a reliable partner. America’s NATO allies were not consulted by the US about its plans to attack Iran, and they responded with a wide range of views. The response of the German government encapsulates this problem well, as it has both supported and opposed the war. At the outset of the fighting, the German Chancellor said that his country supported American action due to the threat posed by Iran. He was “on the same page” as the US. But after only two weeks, he changed his tune, saying that war is raising major questions about Germany’s security, the economic cost of expensive energy, and the potential for another wave of migrants fleeing from the Middle East to Europe to escape the war.
Another example of the failure of this administration to vet and think through policy is the impact of the war in Iran on the Russian invasion of Ukraine. Rising energy prices are bringing huge windfalls to Russia, which sells oil and natural gas all over the world. This props up the Russian economy and allows it to devote more resources in Ukraine. What’s more, in an effort to keep oil prices from rising further, Trump suspended some US sanctions on Russian oil sales, which brings even more money to Putin’s government and eases the international pressure it faces. Trump’s war is also a blow to the Ukrainian war effort, as the United States is using military equipment that might otherwise go to Ukraine. The US has been providing Patriot and THAAD anti-missile systems to Ukraine, but is now using them in Iran at a rapid clip to combat Iranian drones. (The US used more Patriot missiles in two weeks than Ukraine has gotten from the US in four years of war.) These high-end expensive systems cost millions of dollars, and they’re being used to stop drones that cost thousands.
A Blessing and a Curse
Oil and natural gas have fueled not only automobiles, planes, power plants, and industry, they have powered the global economy. But they have also brought their share of vulnerabilities and problems. One these vulnerabilities involves the situation that the world is facing right now. But there are others too. One is described as “the resource curse,” the phenomenon in which countries that possess abundant natural resources like oil and natural gas experience lower economic growth, poorer development outcomes, less democracy, and more political conflict in which competitors fight for over control of those resources. Another is what journalist Thomas Friedman has termed “The First Law of Petropolitics,” in which “the price of oil and the pace of freedom always move in opposite directions…the higher the average global crude oil price rises, the more free speech, free press, free and fair elections, an independent judiciary, the rule of law, and independent political parties are eroded.” In places like Russia and Iran, “self-appointed elites running these states have used their oil windfalls to ensconce themselves in power [and] buy off opponents.”
The warning of former Venezuelan Oil Minister, Juan Pablo Perez Alfonso, is perhaps the most stark. In the midst of rising oil prices in the 1970s, he said that in spite of the optimism at the time that Venezuela would earn great sums from its oil sales, in the end, “oil will bring us ruin. Oil is the Devil’s excrement.”
As people, companies, and countries around the world develop their responses to the war in Iran, the crisis in the Persian Gulf is illustrating in a very inescapable way how dependent the world is upon fossil fuels, and how there is one choke point in the energy supply chain upon which much of the world’s economic well-being and stability depends.
This article is so informative and well written. Thank you!
Great article Dave