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The war in Iran is a seismic political event and a humanitarian cataclysm. But it also has possibly enormous implications for the global economy. Beyond the fate of Iran’s stricken economic system, the most obvious near-term consequences involve the massive amounts of oil and natural gas that travel through the Strait of Hormuz, the crucial conduit between the Persian Gulf and the open ocean. The waterway, which carries about 20 percent of the world’s oil supply on a given day, is no stranger to geopolitical disruption, and for decades, Iran’s ability to hamper or even cripple shipping there has hung over any conflict with its regime. Now, Iran is in its most vulnerable position since the 1979 revolution, shipping in the strait is at a standstill, and nobody knows whether energy markets are in for a small shock or something much more drastic. And the effects are already apparent; gas prices jumped 11 cents between Monday night and Tuesday morning, an enormous one-day gain, as markets slump more generally. To better understand what’s at stake, I spoke with Rory Johnston, a Canada-based oil-market researcher who writes the popular, data-driven newsletter Commodity Context.
You wrote on Monday that the war is “thrusting the oil market into its most perilous situation since Russia’s invasion of Ukraine in 2022.” Global markets have now had a day to digest all this. What have you made of their reaction so far?
So far, the market has reacted almost exactly as I pictured it would, which doesn’t always happen. I think a lot of people have been surprised that the price explosion hasn’t been larger. The reason is that, coming out of the weekend, people were very bullish on prices rising. I think everyone could see that the largest accumulation of military hardware since the invasion of Iraq had been built up in the gulf. Everyone knew where this was going.
My estimate is we already had factored in about a $7 a barrel
“Iran premium” on oil prices. Add another seven, eight bucks on Monday, and that brought us to about $80 for the global benchmark Brent Crude. But if this crisis continues, that’s not going to be enough. Really, the question right now is duration. We don’t see tankers traveling through the Strait of Hormuz. For how long? So far, the strait has not been formally closed. The Revolutionary Guard Corps declared it closed, and then Iran’s foreign minister said Iran had no intention of closing it. So it’s a bit of a gray zone right now. And there have been some tankers that have made it through — only a handful so far, but people are still risking the journey.
Many market observers, myself included, have expected this to be a relatively short and sharp kind of crisis. What we’ve seen from Trump in the past has been a willingness to go way bigger and way bolder than anyone would’ve assumed, compared to the normal behavior of an American president. He has not shown a willingness for longer, drawn-out, messier engagements. He wants to throw the entire might of the U.S. military at something and declare victory in a couple days. That’s what we saw in Venezuela. After he took out Maduro, he basically declared regime change, even though it was literally Maduro’s VP that became president. This past June, during the 12-day war between Israel and Iran, you had a spectacular bombing campaign in terms of its scale and size — 14 bunker-busters on three nuclear sites. That’s a big deal, and markets jumped at the open — and then ended the day $10 down because Trump then took that moment to declare victory and broached a cease-fire. That kind of thing is still my general expectation here, but we’re already slipping outside of that base-case scenario. Obviously, the war has not ended. In fact, things just keep getting hotter, if you will.
Can you explain why the strait’s closure would be such a problem for oil markets?
I view the strait as the world’s largest pipeline. It’s like a big garden hose, and if the strait is closed, it’s like a kink in the line. As soon as you unkink it, things go back to normal pretty quickly. The other risk here, and I think the more durable, real risk of a worst-case scenario for the oil market, is if Iran begins to pivot from just threatening the strait to attacking upstream oil infrastructure all around the gulf. You’ve got Saudi Arabia, the Emirates, Kuwait, Iraq, etc., all well within missile and drone range. And back in 2019, Iran very purposely showed that it could attack major Saudi oil installations despite their defenses.
So if closing the Strait of Hormuz is like a kink in the garden hose, attacking upstream oil assets in facilities producing assets is like taking a shotgun to the faucet to which that garden hose is attached. Everything can be repaired, but you can’t just unkink that. It’s a “repair and rebuild” situation, which takes a much longer time. That becomes a very acute crisis very quickly.
I guess one question is whether Iran even has the capacity to do that right now, given the weakened state of their defense infrastructure.
I wouldn’t expect them to do that until there is literally the final showdown. That’s an existential, cornered-animal type of thing, because there’s no coming back from it. That would be the end of the regime.
And what if this conflict does drag on and the strait remains in this gray zone?
For tanker owners and people thinking about making the journey across the strait — if this were just a short thing, the easiest thing to do is just to wait, right? If it’s going to be over in a day or two, no harm, no foul. A couple of days is about 20 million barrels a day of crude through the strait — three days is 60 million barrels. That’s a lot of oil. But inventories are more than capable of covering the disruption. The issue becomes if it lasts longer. What they’ll do if it does last longer, and what they’re negotiating right now, probably as we speak, is exorbitant premiums for their war-risk coverage. As they’re insured for the risk, they’re going to make the journey.
People are like, “Why would they take the risk?” The answer is the Mad Men “that’s what the money is for” meme. If you’re getting paid to take the risk, people are going to take the risk. The amount of value on the line, both to exporters of the region and for import, particularly in Asia that depend on the region for their fuel — this is an existential crisis. No amount of money is too much to spend to remediate it. I think that’s what we’re going to be seeing. Now that this is not ending as quickly as I think many people had expected, we’ll see who is going to be brave for the cheapest amount of money, and then we’ll figure out what it will take to get everyone back through the strait.
Even back in the ’80s, during the height of the Iran-Iraq tanker war, when over 400 ships were attacked, including 250 tankers, and 55 of those tankers were actually sunk or scuttled — even during that period, the strait never closed formally. You still had people making the journey. But what’s happening right now is that things changed so quickly that insurers, providers, and ship owners no longer felt comfortable that they were hedged for the type of risk they were going to be taking.
Let’s say instead that this disruption is fairly temporary, that the conflict wraps up pretty quickly. Will consumers notice gas prices or other prices going up, even if it’s temporary?
I think if this lasts a couple more days, we’ll see it reflected at the gas pump in terms of overall gas prices. Diesel will be even more acutely affected. I think the big impact will be on freight and shipping rates, and that’s going to hit consumers more on the price of produce, the price of random consumer goods. That’s the type of stuff that diesel will complicate more. So I think you will see an impact at the price of the pumps, but the biggest impact won’t be as visible to consumers immediately. It will take a while to work through the supply chain.
And needless to say, if this drags on for a while, consumers will definitely notice.
Oh yeah. If this lasts longer than a week, that’s where we’re starting to lose barrels at a furious rate, and every day it goes on, there’s the potential for something really spiraling out of control. On Monday, there were reports that an Iranian drone, whether it was the drone itself or debris from one that was shot down, hit various pieces of the massive Ras Tanura refinery and export facility in Saudi Arabia. That’s the kind of stuff I’m talking about that shifts this from temporary destruction to a permanent, structural scarring of global production capacity.
This interview has been edited for length and clarity.
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