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\n Photo: Intelligencer; Photo: Getty Images\n <\/p>\n
The war in Iran<\/a> is a seismic political event and a humanitarian cataclysm<\/a>. But it also has possibly enormous implications for the global economy. Beyond the fate of Iran\u2019s 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\u2019s oil supply on a given day, is no stranger to geopolitical disruption, and for decades, Iran\u2019s 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<\/a> 11 cents between Monday night and Tuesday morning, an enormous one-day gain, as markets slump more generally. To better understand what\u2019s at stake, I spoke with Rory Johnston, a Canada-based oil-market researcher who writes the popular, data-driven newsletter Commodity Context<\/a>.<\/p>\n You wrote<\/a> on Monday that the war is \u201cthrusting the oil market into its most perilous situation since Russia\u2019s invasion of Ukraine in 2022.\u201d Global markets have now had a day to digest all this. What have you made of their reaction so far? My estimate is we already had factored in about a $7 a barrel Many market observers, myself included, have expected this to be a relatively short and sharp kind of crisis. What we\u2019ve seen from Trump in the past has been a willingness to go way bigger and way bolder than anyone would\u2019ve 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\u2019s what we saw in Venezuela. After he took out Maduro, he basically declared regime change, even though it was literally Maduro\u2019s VP <\/a>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 \u2014 14 bunker-busters on three nuclear sites. That\u2019s a big deal, and markets jumped at the open \u2014 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\u2019re already slipping outside of that base-case scenario. Obviously, the war has not ended. In fact, things just keep getting hotter, if you will.<\/p>\n Can you explain why the strait\u2019s closure would be such a problem for oil markets? 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\u2019t just unkink that. It\u2019s a \u201crepair and rebuild\u201d situation, which takes a much longer time. That becomes a very acute crisis very quickly.<\/p>\n I guess one question is whether Iran even has the capacity to do that right now, given the weakened state of their defense infrastructure.\u00a0 And what if this conflict does drag on and the strait remains in this gray zone? People are like, \u201cWhy would they take the risk?\u201d The answer is the Mad Men \u201cthat\u2019s what the money is for<\/a>\u201d meme. If you\u2019re 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 \u2014 this is an existential crisis. No amount of money is too much to spend to remediate it. I think that\u2019s what we\u2019re going to be seeing. Now that this is not ending as quickly as I think many people had expected, we\u2019ll see who is going to be brave for the cheapest amount of money, and then we\u2019ll figure out what it will take to get everyone back through the strait.<\/p>\n Even back in the \u201980s, during the height of the Iran-Iraq tanker war,<\/a> when over 400 ships were attacked, including 250 tankers, and 55 of those tankers were actually sunk or scuttled\u00a0\u2014 even during that period, the strait never closed formally. You still had people making the journey. But what\u2019s 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.<\/p>\n Let\u2019s 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\u2019s temporary? And needless to say, if this drags on for a while, consumers will definitely notice. This interview has been edited for length and clarity.\u00a0<\/p>\n
\ufeffSo far, the market has reacted almost exactly as I pictured it would, which doesn\u2019t always happen. I think a lot of people have been surprised that the price explosion hasn\u2019t 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.<\/p>\n
\u201cIran premium\u201d on oil prices. Add another seven, eight bucks on Monday, and that brought us to about $80 for the global benchmark Brent Crude<\/a>. But if this crisis continues, that\u2019s not going to be enough. Really, the question right now is duration. We don\u2019t 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\u2019s foreign minister said<\/a> Iran had no intention of closing it. So it\u2019s a bit of a gray zone right now.\u00a0And there have been some tankers that have made it through \u2014 only a handful so far, but people are still risking the journey.<\/p>\n
\ufeffI view the strait as the world\u2019s largest pipeline. It\u2019s like a big garden hose, and if the strait is closed, it\u2019s 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\u2019ve 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<\/a> despite their defenses.<\/p>\n
\ufeffI wouldn\u2019t expect them to do that until there is literally the final showdown. That\u2019s an existential, cornered-animal type of thing, because there\u2019s no coming back from it. That would be the end of the regime.<\/p>\n
\ufeffFor tanker owners and people thinking about making the journey across the strait \u2014 if this were just a short thing, the easiest thing to do is just to wait, right? If it\u2019s 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 \u2014 three days is 60 million barrels. That\u2019s a lot of oil.\u00a0But inventories are more than capable of covering the disruption. The issue becomes if it lasts longer. What they\u2019ll do if it does last longer, and what they\u2019re negotiating right now, probably as we speak, is exorbitant premiums for their war-risk coverage. As they\u2019re insured for the risk, they\u2019re going to make the journey.<\/p>\n
\ufeffI think if this lasts a couple more days, we\u2019ll 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\u2019s going to hit consumers more on the price of produce, the price of random consumer goods. That\u2019s 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\u2019t be as visible to consumers immediately. It will take a while to work through the supply chain.<\/p>\n
Oh yeah. If this lasts longer than a week, that\u2019s where we\u2019re starting to lose barrels at a furious rate, and every day it goes on, there\u2019s 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<\/a> of the massive Ras Tanura refinery and export facility in Saudi Arabia. That\u2019s the kind of stuff I\u2019m talking about that shifts this from temporary destruction to a permanent, structural scarring of global production capacity.<\/p>\n