Four Options for the United States: The Iran Conflict After the Democratic Victory

The Democrats have achieved a stunning victory at the midterm elections, capturing sizeable majorities in both the House and the Senate. Democrats ran hard against the Hormuz war — framing it as Trump’s misadventure, an unwinnable conflict bleeding American credibility and Gulf allies alike. In light of this dramatic political upheaval, US policy options for the Iran conflict deserve an update.

There are four options. Two can be dismissed quickly. Two define the real choices available to the US.

OPTION 1: FULL-SCALE WAR Off the table

The US can launch a full-scale war aimed at destroying Iranian military capacity and forcing regime change. We estimate a successful invasion would require six months of planning and an additional four months to victory. Further, it would cost more than $4 trillion, demand at least 400,000 troops, produce 16,000 US military deaths, and require 12–16 years of occupation — with no guarantee that any Iranian government post-withdrawal would be pro-American. A full invasion was never really on the table, and it is most certainly not politically viable in light of the Democrats’ win.

OPTION 2: CONTINUED DRIFT The default

In the last six months, the war has devolved into one of political drift and economic attrition. The belligerents have been able neither to agree a settlement nor end the conflict. The drift can persist indefinitely.

The US tactics have turned to sanctions covering oil shipping, banking, aviation, digital assets, and technology. These add to the US naval blockade which has reduced Iranian seaborne crude exports to effectively zero — down from roughly 1.7 million barrels per day before the war. Iran’s GDP has been contracting at 6.1 percent; inflation runs at nearly 70 percent; food prices are up more than 100 percent; and two million jobs have been lost. And yet Iran has not sued for peace. Iran is under pressure, but it has not buckled.

Meanwhile, Tehran is keeping its own pressure on the Strait of Hormuz and the region more broadly. Crude oil is moving, but independent trackers count only 7–13 transits daily against a pre-war baseline of roughly 100 ships per day — a 90 percent collapse in traffic. Container lines, LNG carriers, and most commercial shippers have effectively suspended operations.

Iran also continues to strike throughout the region, including the use of the Houthis to compromise Red Sea traffic and attack Saudi infrastructure. On November 8, Houthi missiles struck the Aramco tower in Riyadh’s financial district, damaging the building. The war is about more than just control of the Strait.

One version of drift — Iran analyst Trita Parsi’s “Swiss cheese” scenario — imagines a managed retreat from enforcement: sanctions nominally in place but quietly eroding, Asian and Middle Eastern countries gradually resuming trade with Iran, both sides maintaining a fiction of restrictions while sliding toward a de facto equilibrium. It is an appealing picture. It is also structurally unstable. Drift does not solve the three problems that make the conflict irresolvable in the first place. Iran remains under sanctions, with its economy crippled and no path to relief short of a political settlement. The nuclear program remains unaddressed and continues to advance, moving Iran closer to a threshold that will eventually force another crisis. And an Iran under permanent economic pressure has every incentive to keep using force — tanker strikes, proxy attacks, Strait harassment — to raise the cost of the status quo until someone offers a real deal. Just this week, four tankers were hit in two days — two supertankers disabled by mines on November 11, two more caught fire on November 12.

In short, neither the US nor Iran can claim to be winning, and both — and more importantly, the Gulf states — are paying the price of a grinding conflict. What was supposed to be a short war has turned into an indecisive quagmire for all parties, with every prospect of continuing for years.

From the Democratic perspective, a chronic, low-level conflict is far from desirable, but as long as Trump can be blamed and oil prices are not too high, the Democrats can afford to take a passive view of policy: it is Trump’s war; let him solve it. While Democrats may want to end the war, the political equilibrium may devolve into simply more of the same.

OPTION 3: CLOSING STRIKE AND WITHDRAWAL Trump’s trump card

In this scenario, Trump announces a large military strike — Iranian naval assets, Revolutionary Guard facilities, potentially nuclear infrastructure — declares victory and withdraws from the Gulf. He claims that this is the best he can do — and he hopes it should be enough — but the Democrats have undermined US strategy in the war and therefore he has no choice. He has to withdraw. The conflict is now a regional problem to be handled by the regional players, Israel and the Gulf states.

This has both positive and negative implications. First, it guts US Indian Ocean naval strategy. US bases in the Gulf will become inaccessible even as the Houthis ensure that the US cannot freely reposition vessels from the Mediterranean to the Gulf of Aden and on to the Indian Ocean. As a practical matter, a US pullout will effectively cede a quarter of the globe — from the Red Sea to the Strait of Malacca — to the rising Chinese navy.

On the other hand, it is the surest path to low oil prices. Iran has no interest in preventing Gulf oil exports. It wants to toll them. Such a toll could be considered a tariff, and indeed, it would be on container imports to Gulf ports like Jebel Ali in Dubai. Gulf producers, however, would absorb tolls on energy exports like crude oil and refined products. Full cycle oil production costs — including exploration, drilling, well construction, extraction, maintenance, and pipeline transport to Gulf loading docks — are not more than $14–18 per barrel across the Gulf. At the same time, Iran would likely seek to implement tolls limiting revenues to Gulf producers at perhaps $40–50 per barrel. Thus, even with a toll of, say, $25 per barrel, Gulf producers would still have a profit margin exceeding 50 percent of revenues. Meanwhile, Gulf producers cannot raise their prices above global market levels without losing customers. Therefore, the producers would absorb the toll and continue to profitably export without any adverse impact on consumers across the globe, including China, India, Europe, and the US. By pulling out of the Gulf and ceding the Strait to Iran, Trump would take the most direct route to lower oil prices.

This poses quite a quandary for Democrats. They cannot endorse the pullout without being blamed for the collapse of US Indo-Pacific power and the abandonment of our Gulf allies. Nor would Israel be happy, and the Israeli lobby remains robust, notwithstanding its current lack of popularity. Further, nothing would help Trump and Republicans more than low oil prices heading into 2028. Thus, Democrats may fail to embrace a unilateral US pullout, despite their criticism of the war.

It could still happen. The Trump administration withdrew the last US forces from Iraq in September — in the midst of the current war. Trump has no loyalty to the Gulf states beyond limiting his personal political blowback. If he thinks a pullout benefits him personally, he may well do it.

OPTION 4: NEGOTIATED SETTLEMENT Viable and unloved

It is hard to describe negotiations to date as other than a joke. The gap between Iranian demands and American offers has been so wide as to render the talks structurally non-serious — wildly “out of the money,” as an options trader might say.

Iran’s demands have been entirely consistent from Day 1: control of the Strait, removal of sanctions and the blockade, the return of frozen funds, and a cessation of hostilities both against Iran and its proxies — Hamas, Hezbollah, and the Houthis. In return, Tehran would allow free transit of the Strait — subject to a toll — and would enter negotiations regarding the fate of its nuclear material and related program, with some indication that it would yield on this matter.

The US wanted — and still wants — no toll, immediate discussion of Iran’s nuclear program, no commitments by Israel, and frankly, no transfer of funds to Tehran. Consequently, negotiations are at a standstill.

The unprovoked attack by Israel and the US on Iranian leadership, coupled with the wide-ranging bombing campaign and even wider-ranging threats to the country, leave Tehran with little room to compromise. To abandon a claim to the Strait would be tantamount to admitting defeat in a war. That is a non-starter for Tehran.

However, the Iranians on numerous occasions have intimated that they are willing to take cash in return for concessions. This offer has gone exactly nowhere. No valuation of various concessions. No related deal structuring. Absent such analysis, the US offer is far, far off the mark, and well beyond salvage by Qatari diplomatic repackaging.

Our analysis, now as six months ago, indicates that Iran is willing to consummate a deal on terms acceptable to the Gulf states and the US, and possibly to Israel depending on certain specifics. The impediment is not Iran, but rather a Trump administration fixated on a stillborn approach. Nevertheless, a workable deal looks entirely feasible.

Democrats can hardly oppose a negotiated settlement. They may take some credit for forcing Trump towards more constructive engagement. Nevertheless, a negotiated settlement perceived to be balanced and fair would principally benefit the President and the Republican Party and set the stage for at least a partial comeback in the 2028 elections.

THE CHOICE

Overall, the balance of probabilities favors either a continuation of the Iran conflict with varying degrees of intensity or a unilateral withdrawal by the US under a banner of “Mission Accomplished” borrowed from George Bush. The Democrats will have an incentive to keep the matter at arms length and let Trump take the blame or credit, with every expectation that the next two years will be no better than a continuation of the conflict which has brought the Democrats to their greatest victory in decades.

Steven Kopits is Managing Director of Princeton Policy Advisors.

Want to Avoid the Strait of Hormuz? Not easy.

After hostilities began in late February, Iran largely closed the world's most important waterway, the Strait of Hormuz, to normal commercial traffic. Transits have recently rebounded, but not to a full reopening. Stratified, partial flows have returned: crude oil is moving under US naval escort and state-company arrangements; refined products are moving at a fraction of pre-war levels; containers, LNG, and general commerce are still largely absent. At the same time, Iran has intensified its attacks on shipping — 35 vessels struck in October 2026 alone, the worst month of the war, with more than 30 supertankers damaged since February. The strait is neither reliably open nor permanently closed. It is a militarily managed corridor for state energy companies, while ordinary commercial shipping has largely abandoned it.

The economic damage has propagated far beyond the energy sector. Dubai is in recession. Jebel Ali, the Middle East's largest container port, is running at roughly ten percent of pre-war capacity. Emirates airline profits are down two-thirds. Gulf real estate has posted its first price declines since the pandemic. Qatar's LNG exports — one-fifth of global trade — have collapsed to under ten percent of pre-war volumes. These are not pipeline problems. No bypass route addresses them.

Consider a country-by-country assessment.

SAUDI ARABIA

Saudi Arabia is the Gulf's bypass success story — and even here the picture is complicated. To hedge against closure of the Strait, the Saudis built the East-West Pipeline — known as the Petroline — running west to the Red Sea port of Yanbu, carrying up to 7 million barrels of crude per day. The Petroline is exclusively Saudi — no other country uses it, although Riyadh has been in early talks with Kuwait, Bahrain, and Qatar about possible future access.

The Petroline helps but does not fully offset dependence on Hormuz. Yanbu port can now export approximately 5 million barrels per day of crude, against pre-war Saudi crude exports of approximately 7.3 million barrels per day. Nor does it provide an exit for Saudi exports of refined products and LPG of nearly 2 million barrels per day before the war. Actual Petroline flows have been highly variable — dropping to 2 million barrels per day in August 2026 during Houthi disruptions before recovering to 5.8 million by October. The pipeline is not a stable bypass; it is a contested route.

Saudi Arabia does have genuine product export capability at Yanbu. The YASREF and Petrorabigh refinery complexes together process roughly 800,000 barrels per day of crude arriving via the Petroline into products that can be exported directly on the Red Sea. This is real — but it covers at most 40 to 50 percent of pre-war Saudi product exports, most of which moved east through Hormuz from Jubail and Ras Tanura. The Petroline carries crude, not products; moving Gulf coast refinery output to Yanbu would require a separate dedicated products pipeline that does not exist. Saudi Arabia has partially solved its products bypass problem, but only partially.

A full bypass covering all Saudi export streams would require three to four dedicated pipelines plus further Yanbu port expansion at a total cost of $30–50 billion and requiring 5–7 years under normal circumstances. Aramco is studying a 1–2 million barrel per day Petroline expansion, but it remains at the study stage. Such infrastructure remains vulnerable to Iranian interdiction regardless. Iran and its Houthi proxies have struck the Petroline repeatedly — in April (700,000 bpd offline, restored in three days), September (Yanbu loadings halted for two weeks), and again in late October and November. The pipeline is not a stable bypass; it is a contested route under recurring attack.

Saudi Arabia's Petroline bypass terminates at a second chokepoint that has since become a second crisis. Since July, the Houthis have seized Mokha port, Mayyun Island at the strait's entrance, and the Hanish Islands archipelago — physically occupying the coastline and islands that dominate Bab el-Mandeb strait. The strait gates maritime traffic between the Mediterranean and Indian Ocean. Together, Bab el-Mandeb and the Strait of Hormuz give Iran control over two of the world’s critical chokepoints.

UAE

No country has been more affected by the war than the UAE. Iran fired more than 1,800 missiles and drones at the UAE — more than at any other country — striking oil facilities, airports, and port infrastructure. The UAE's bypass pipeline — ADCOP — carries 1.8 million barrels of Abu Dhabi crude per day past the Strait to Fujairah on the Gulf of Oman. A second pipeline, West-East 1, is under construction and is expected to add a further 1.8 million barrels per day by 2027. Iran has struck Fujairah repeatedly during the conflict. The port remains well within Iranian striking distance and will not prove a reliable bypass regardless of its nominal capacity.

The UAE's crude production story is, paradoxically, one of the war's few bright spots. Abu Dhabi left OPEC in May, pumped a record 4.1 million barrels per day in June, and crude exports have largely recovered to or above pre-war levels through a combination of ADCOP flows, Fujairah loadings, and escorted Hormuz transits. On oil alone, Abu Dhabi is managing.

But the UAE is not just Abu Dhabi. Dubai's economy shrank 2.3 percent in the first half of 2026, and the broader non-oil economy contracted in the second quarter. Jebel Ali port handled 3.8 million containers in the second quarter of 2025; in the second quarter of 2026, it handled 374,000 — a collapse of 90 percent. Every container transits Hormuz. There is no bypass pipeline for containers.

Emirates airline profits fell 66 percent in the first half of 2026, with passenger traffic down 22 percent. Dubai International handled 95 million passengers in 2025; in March 2026, traffic fell 66 percent to 2.5 million for the month alone. Dubai's real estate market posted its first price declines since the pandemic, with transaction volumes down 30 to 60 percent depending on segment. Some family offices have moved assets toward Singapore. The country's expatriate population — 90 percent of residents — is not fleeing en masse, but the mix is shifting: short-term workers and regional headquarters staff are leaving, and new arrivals are fewer.

For the UAE, the cost of perpetual Iranian hostility is not measured only in pipeline capacity. Almost the entire economy is at risk. Emirates airline depends on Dubai being among the world's safest and most connected hubs. Dubai's tourists will go elsewhere if they feel in danger. The desirability of its real estate to international buyers will collapse and with it, construction. Its financial firms may relocate to more stable venues. If the conflict persists, the UAE that we have known for the last decades will cease to exist — not through destruction of physical infrastructure, but through the evaporation of everything that depended on the Gulf being open, insurable, and safe.

IRAQ

Iraq's pre-war crude exports of over four million barrels per day went almost entirely through Basra and Hormuz. Output collapsed by roughly 70 percent in March 2026 and has only partially recovered, reaching 3.4 to 3.5 million barrels per day of exports in October — up sharply from 2.65 million barrels per day in September, but still dependent on the continuation of US naval escort operations through a contested strait. Iraq's Foreign Minister has put cumulative war losses at $60 billion.

Three bypass alternatives exist: north through Sunni Anbar and Kurdish territory to Turkey's Mediterranean coast; west through the long-defunct IPSA pipeline to Saudi Arabia's Yanbu; or the Kirkuk-Baniyas pipeline to Syria's Mediterranean coast, being promoted by the US with Chevron, TotalEnergies, and other partners. The northern route requires completing the Basra-Haditha pipeline — 700 kilometers (435 miles) through Anbar, with 2.5 million barrels per day design capacity, $4.6 billion approved and groundbreaking in May 2026, but still three to five years from meaningful flows depending on further budget allocations. The Kirkuk-Baniyas route is at the memorandum-of-understanding stage, with a $4.5 billion reconstruction cost estimate and a three-year build timeline; it could eventually carry up to 1.5 million barrels per day. None covers more than a fraction of pre-war export volume on any near-term timeline.

Iraq faces not only cost and logistics challenges but political forces likely to stymie any escape route through maneuvering or outright violence. Every northern route requires managing Sunni tribal politics, Kurdish autonomy disputes, and a Baghdad-Ankara transit agreement that expired July 28, 2026 and was replaced only on August 1 with a one-year stopgap covering 750,000 barrels per day — with long-term terms still unresolved. The western route requires the Shia-majority government to sign a strategic agreement with Sunni Saudi Arabia — giving Riyadh leverage that competes directly with Iranian influence. Iran has enough proxy militia presence to make any Iraqi pipeline uninsurable and enough parliamentary influence to block a Saudi agreement before it is signed. Iraqi militia have already publicly vowed to attack a Kirkuk-Baniyas pipeline, calling it a vehicle for 'stealing our oil.'

The human cost compounds the economic: Iraq imports 80 percent of its food through Gulf ports, and 90 percent of the Iraqi government budget comes from oil revenues. Without sustained oil exports, Iraq becomes a failed state fully under Tehran's control. To make matters worse, US forces completed their withdrawal from Iraq on September 30, 2026 — ending a 23-year presence and removing the last external counterweight to Iranian influence.

KUWAIT

Kuwait exported roughly 2.5 million barrels per day before the war through a single route — Hormuz. Production has partially recovered to around 2 million barrels per day, but export infrastructure remains dependent on the contested strait. Two bypass directions exist: north through Iraqi territory, facing the same political obstacles that confront Iraq itself and worse given Kuwait's limited leverage with Baghdad; or south through Saudi Arabia via a new pipeline connection to the Petroline. Saudi Arabia is in preliminary discussions to accommodate Kuwaiti barrels, and Kuwait is exploring access to Fujairah for exports. No deals have been signed. Expansion would take years, cost billions, and place Kuwait's export lifeline under Saudi operational control.

Whether Iran would permit Kuwait to develop an alternative export route through Saudi Arabia is another matter entirely. Tehran has both the motive and the demonstrated willingness to strike Kuwaiti infrastructure, and a Kuwait that can bypass Hormuz is a Kuwait that escapes Iranian leverage. Kuwait has some hope of finding an exit through Saudi Arabia — but it will require time, money, and an existential dependence on Riyadh that Kuwait may find hard to swallow. Iran may be expected to do everything possible to hold Kuwait hostage and defeat any initiative to complete a bypass.

QATAR

Qatar's vulnerability is not oil — it is 77 million tonnes per year of liquefied natural gas from Ras Laffan, representing roughly one-fifth of all LNG traded globally. LNG and associated gas production represent roughly two-thirds of Qatar's GDP and 85 percent of export earnings. Every molecule transits Hormuz. In September 2026, Qatar formally ruled out a bypass pipeline, acknowledging that both theoretical alternatives — overland through Oman to the Indian Ocean coast, or through Saudi Arabia to the Red Sea — would require new liquefaction capacity of 65 million tonnes per year at a cost of $150 billion or more and fifteen to twenty years of construction.

The numbers are devastating. Qatar exported approximately 6.4 million tonnes of LNG per month before the war. September exports were 1.6 million tonnes — 25 percent of pre-war levels. October is projected at 0.6 million tonnes — under ten percent. Two Ras Laffan liquefaction trains have been damaged and require an estimated three years to repair. Qatar has attempted to move some cargoes under Pakistan's bilateral arrangement with Iran, but this covers a small fraction of pre-war volumes and is itself subject to Iranian goodwill. A closed or contested Hormuz is not a disruption to Qatar's economy. It is the destruction of Qatar's economy.

BAHRAIN

Bahrain presents a paradox. Its oil bypass problem is the most manageable — 200,000 barrels per day, already partially integrated into Saudi infrastructure through the shared Abu Saafa field. On oil, Bahrain is the easiest problem at the table.

Everything else is more complicated. Bahrain is the most economically diversified Gulf state — oil is only 14 percent of GDP — but that diversification has produced a cluster of large, fixed, maritime-dependent industrial facilities at Sitra that Iran has already demonstrated it can strike at will. ALBA, the world's largest single-site aluminum smelter at $4.4 billion in revenue, requires alumina by ship and port access for 1.6 million tonnes of metal exports. BAPCO's newly modernized 380,000 barrel per day refinery requires crude input and product export by ship. GPIC's petrochemical exports and ASRY's ship repair business are both functionally closed when Hormuz is closed. Iran struck Sitra repeatedly during the conflict.

Tourism — 11 percent of GDP — is paradoxically the most resilient. The overwhelming majority of Bahrain's 8.3 million annual visitors drive across the King Fahd Causeway from Saudi Arabia. If the causeway stays open, the tourists will keep coming. Bahrain can probably weather a permanent closure of the Strait at an immediate and lasting cost of around 15 percent of its GDP — painful but survivable.

THE CALCULUS

Iran has not closed the Strait of Hormuz in the conventional sense. It has done something more strategically durable: it has made the strait dangerous enough that normal commercial shipping has largely abandoned it, while state-escorted crude convoys continue to move through under military protection. The result is a stratified access regime. State energy companies — Saudi Aramco, ADNOC, Iraq's SOMO — move crude under US naval escort or bilateral arrangement. Independent commercial operators, products tankers, container ships, and LNG carriers face a shooting gallery: 113 to 135 ships hit since February, 35 in October alone — the worst month of the war — with more than 30 supertankers damaged. Iran is simultaneously escalating attacks as crude flows partially recover, a paradox that reflects deliberate strategy: target the commercial and industrial shipping that generates no US escort protection while state crude flows provide political cover against full US escalation.

Iran's toll system — up to two million dollars per vessel, collected in cryptocurrency and yuan, formalized by the Iranian parliament — operates in the gaps. No Gulf government has openly admitted paying, but the system is operational. The Strait of Hormuz is now a managed political resource, not a free international waterway. This is precisely the outcome Iran sought: not closure, but control.

The bypass options are expensive, slow, and incomplete — and they are not easily financed into the current environment. A Gulf-wide crude bypass program would take a decade and cost well over $100 billion. Investors would certainly be reluctant to finance a ten-year infrastructure project in a war where the security environment could not only deteriorate, but also stablize, leaving their investments stranded. Products pipelines are technically buildable but require separate dedicated infrastructure — different steel specifications, pressure controls, and multiple lines for different grades — adding further cost and years. LNG has no pipeline solution at any price on any relevant timeline. Nor does any bypass solve the Saudi dependency problem: every meaningful overland route runs through Saudi territory, and Saudi Arabia is not immune. The Petroline has already been struck, and its Yanbu terminals now face Houthi forces that physically control Bab el-Mandeb — having seized the port of Mokha, Mayyun Island, and the Hanish archipelago since July. An official claimed in August that Hormuz would be 'irrelevant in two years' as Gulf states build alternative routes. The Houthi seizure of Bab el-Mandeb answered that claim before the ink was dry.

The most likely near-term outcome appears to be not resolution but chronic episodic conflict — recurring strikes, periodic Hormuz disruption, and a contested transit regime that operates in the gaps between military engagements. Under this scenario, the strait remains neither reliably open nor permanently closed, and the bypass projects that require a decade of stable financing may not be built. The Gulf states are trapped not by a lack of engineering imagination but by the fundamental reality that Iran has made the Strait of Hormuz a political instrument, and no pipeline resolves that political problem.

Finally, it is not only energy at stake. Container shipping, tourism, real estate, finance, and aviation are all under actual threat in ways that no pipeline addresses. Dubai's recession is not an oil story. Jebel Ali at ten percent capacity is not an oil story. Emirates airline at two-thirds of its pre-war profit is not an oil story. The economic cost of chronic Iranian hostility extends far beyond the barrel price into every sector that depends on the Gulf being safe, connected, and insurable.

Can the Gulf states avoid the Strait of Hormuz? In the best case, partial displacement of crude oil is possible over the next half decade — if the security environment stabilizes enough to finance the infrastructure. For refined products, the displacement would be partial at best. For containers, tourism, real estate, and finance, there is no bypass. For Qatar's LNG, there is no solution at any price on any timeline relevant to current geopolitics. The Strait of Hormuz is not a problem to be engineered around. It is a political contest that must be resolved — or endured.

Steven Kopits is Managing Director of Princeton Policy Advisors.

Ilhan Omar: Part I - Who is she, really?

To understand the legal storm surrounding Congresswoman Ilhan Omar — the fake name, the changed birthdate, and the alleged marriage to her brother — one must first understand her father. Every allegation and controversy traces back to decisions he made in the historical context of his military service, the collapse of Somalia, and the nature of refugee policy at the time of his immigration to the United States. His story directly leads to the charges against Ilhan Omar.

Ilhan Omar’s father, Nur Said Elmi Mohamed — who entered the United States under the assumed name Nur Omar Mohamed — was born around 1953 in Bandarbeyla, a coastal town in Puntland, northeastern Somalia, according to reporting by the New York Post. He joined the Somali National Army sometime in the early 1970s, shortly after General Mohamed Siad Barre seized power in a 1969 military coup and declared Somalia a Marxist state aligned with the Soviet Union. Barre would rule Somalia for twenty-two years, transforming the country’s military into the central instrument of his authoritarian regime.

According to Yusuf Ismail Faraton, a fellow officer who served with Nur Said in the Somali National Army and later emigrated to Minneapolis, and Mohamed Haji Ingiriis, an Oxford University historian specializing in the Somali civil war, Nur Said rose to the rank of colonel and commanded multiple military brigades. Faraton claims personal knowledge; Ingiriis speaks as a researcher. At the time, senior Somali officers attended the Frunze Military Academy in Moscow or Egyptian military academies, and Ingiriis told the New York Post that Nur Said received such training, though no documentary record of this has been produced publicly. A third source, an unnamed retired Somali officer still living in Somalia, told the New York Post that Nur Said was “feared.” No military service records have been produced publicly to corroborate these accounts, which rest on testimony alone.

Over the following two decades, the Barre regime grew increasingly repressive. By the 1980s Barre was turning his military against his own people, singling out the Isaaq clan of northern Somalia for systematic atrocities: mass killings, rape, destruction of towns and water supplies. Human Rights Watch documented what historians now call the Isaaq genocide of 1987-1989, in which an estimated 50,000-200,000 people were killed. Armed resistance grew, the regime’s control fragmented, and in January 1991 Barre was overthrown and fled the country. According to Ingiriis, Nur Said served throughout this entire period and ran the Daynuunaay military school — training officers for the regime even as it carried out its worst violence. Whether he personally participated in atrocities has not been established by any source. What the testimony of Ingiriis and Faraton establishes is that he was an active pillar of the institutional structure that made those atrocities possible.

When Barre’s regime collapsed in January 1991 and clan militias began settling scores with regime officers, Nur Said would have faced an existential choice. Officers of his rank and background were being hunted. He could not claim refugee status as himself — US refugee law explicitly excludes persecutors from protection, and a colonel in the regime that had just committed mass atrocities would not qualify. According to the reconstruction by independent investigator David Steinberg, whose open-source research has been corroborated by subsequent federal court filings, Nur Said headed to the Dadaab refugee camp in Kenya with at least two of his children — Ilhan and Sahra. The whereabouts of his other children during this period remain undocumented in the public record.

At some point — whether to protect himself from retribution within the camp, to improve his prospects for refugee admission, or both — he began using the name Nur Omar Mohamed. He applied for refugee status under that name. Two plausible reasons explain the decision. Nur Said may have worried that his history was known to the US State Department, which would have certainly disqualified him for refugee status. Alternatively, he may have already applied under his true name and been rejected. This latter conjecture poses some interesting possibilities. If he did so, then the State Department should have a record of that application — including the two girls and their correct birthdates, since he would have had little reason to falsify them at that point. That document, if it exists, would be among the most valuable pieces of evidence in the current federal investigation.

Be that as it may, Nur Said applied under the Omar name and the State Department accepted his representation. This may seem utterly bizarre in the current context, but at the time the situation on the ground made rigorous vetting extraordinarily difficult. The Dadaab camp was built in 1991 to house 90,000 refugees — by 1992 it held 400,000, expanding to what would eventually become the largest refugee camp in the world. Many, and perhaps most, of those arriving had little or no documentation — Somalia’s civil war had shattered the state apparatus that issued such records. As a consequence, immigration policy was reduced to relying on verbal representations supported by thin or anecdotal evidence. Thus, Nur Said was transformed into Nur Omar — and Ilhan and her sister Sahra were reinvented as Omars alongside him.

This then explains the Ilhan Omar name controversy. Her birth name was Ilhan Nur Said Elmi — but her legal name and legal date of birth in the United States are those on her immigration documents. She is, in the US, legally Ilhan Omar.

Given the lack of supporting Somali documentation, how can we be sure that Nur Omar Mohamed was in fact Nur Said Elmi Mohamed? The evidence is cumulative and comes from multiple independent sources. First, a 1997 UK marriage certificate for Leila Nur Said Elmi — obtained by the New York Post — lists the bride’s father as “Nur Said Elmi” with his profession as “military officer.” Second, the father maintained a Facebook page under the name “Nur Said” — and Leila publicly left hearts on his photos, linking the two accounts. Third, Ilhan Omar’s own deleted 2013 Father’s Day post referred to her father as “Nur Said” — using his real name publicly before the controversy surfaced. Fourth, Yusuf Ismail Faraton, a fellow officer who served alongside him in the Somali National Army and later also emigrated to Minneapolis, identified him by his real name and military rank. Fifth, when Nur Omar Mohamed died in June 2020, community condolences on social media addressed him as “Nur Said Elmi” — the community that knew him in Minneapolis knew his real name. Taken together, these sources — a UK government document, social media records, the congresswoman’s own posts, eyewitness testimony, and community testimony — establish with reasonable confidence that Nur Omar Mohamed was Nur Said Elmi Mohamed, meaning that Ilhan Omar was in fact Ilhan Nur Said Elmi.

The allegation that Ilhan Omar is in fact a Nur Said Elmi holds up.

Ilhan Omar: Part II - The Husband/Brother

Another key controversy surrounding Ilhan Omar involves her marriage the Ahmed Nur Said Elmi, believed to also be her brother.

To understand the allegations surrounding Ilhan Omar’s marriage to Ahmed Nur Said Elmi, one must first understand Somali naming conventions. In Somali culture, names follow a patronymic chain: a person’s middle name is their father’s first name, and their last name is their paternal grandfather’s first name. So “Ilhan Nur Said Elmi” means Ilhan, daughter of Nur Said, granddaughter of Elmi. “Ahmed Nur Said Elmi” means Ahmed, son of Nur Said, grandson of Elmi. If both carry the same patronymic chain — Nur Said Elmi — they share the same father: a man named Nur Said, son of Elmi. The naming convention alone establishes a putative family connection between Ilhan and Ahmed. It does not by itself establish that their shared “Nur Said” is the same man as Nur Omar Mohamed of Minneapolis — that requires a second step. But it is the foundation on which the entire family structure rests.

The link between the UK Elmis’ “Nur Said” and Minneapolis’s Nur Omar Mohamed rests on several converging pieces of evidence. First, Leila Nur Said Elmi’s 1997 London marriage certificate — a primary document obtained by the New York Post — lists her father as “Nur Said Elmi, military officer.” Second, the father maintained a Facebook page under the name “Nur Said” while living in Minneapolis as Nur Omar Mohamed — and Leila publicly interacted with that page, linking her directly to the Minneapolis man. Third, when Nur Omar Mohamed died in June 2020, community condolences on social media were addressed to both Ilhan in Minneapolis and Leila in London as bereaved daughters — the community that knew him treated them as siblings mourning the same father. Fourth, Ilhan Omar’s own deleted 2013 Father’s Day post referred to her father using the name “Nur Said” — the same name carried in the UK Elmis’ patronymic chain. Taken together, these four pieces of evidence — a primary document, social media interaction, community testimony, and Ilhan’s own words — establish with reasonable confidence that the “Nur Said” in the UK Elmis’ names is the same man who lived in Minneapolis as Nur Omar Mohamed. Leila, Ahmed, and Mohamed Nur Said Elmi are, on this evidence, Ilhan Omar’s siblings.

How Leila, Mohamed, and Ahmed Nur Said Elmi came to be in the United Kingdom is not documented in any public record. Their father and younger sisters spent years in the Dadaab refugee camp before entering the US in 1995; of the UK branch, we know only that they established themselves in Britain under the Elmi name. By 1997, Leila was sufficiently settled in London’s Camden district to marry there, suggesting she had been in the country for at least a year or two before that. Mohamed remains the least documented of the siblings — named in investigative reporting but without a confirmed address, career, or public record.

Ahmed, the third UK sibling, is reasonably well documented. UK Companies House records list him as a director of a now-dissolved company and record his birth as April 1985 and his nationality as British. Address records documented by independent investigator David Steinberg place him in the same London neighborhood as Leila. Social media and family photographs show that the two branches remained in contact across two continents. It is Ahmed — believed to be the youngest of the UK siblings, raised by Leila in London, brought to Minneapolis under circumstances that remain disputed — who sits at the center of the second major controversy surrounding Ilhan Omar.

According to Abdihakim Osman, a Minneapolis Somali blogger who knew Omar and Hirsi and who spoke to the Daily Mail in 2020, Ahmed’s family sent him to Minneapolis as a form of “rehab” after he fell in with what they regarded as bad influences in London. As a British citizen, Ahmed would have needed no visa to enter the US. He arrived in Minneapolis sometime before February 2009. On February 12, 2009, he and Ilhan Omar were legally married in Hennepin County, Minnesota. He subsequently attended North Dakota State University, reportedly from 2010 to 2012, before returning to the United Kingdom.

On its face, this is the record of an ordinary marriage. The allegation is that it was nothing of the sort: that Ilhan Omar married her brother, and did so to defraud US immigration authorities. The case rests on two separate but related questions — the biological relationship and the fraudulent purpose — and the evidence for each is distinct.

On the question of biological relationship, the circumstantial case is substantial. Ilhan and Ahmed share an identical patronymic chain — Nur Said Elmi — indicating the same father. Osman told the Daily Mail that both Omar and Hirsi had told him Ahmed was Omar’s brother, and that no one in the community knew a wedding had taken place until the marriage certificate surfaced years later. Screenshots published by David Steinberg reportedly showed Ahmed on Instagram holding Omar’s newborn daughter and calling her his niece; the account has since been deleted, and the screenshots could not be independently verified. No prior romantic relationship between the two has been documented.

Further, Ahmed Elmi is gay. In a 2026 academic paper attributed to him, he wrote: “As a gay man of the East African diaspora, my fieldwork was never neutral.” His doctoral research at the University of Bristol examines queer resistance to violence and criminalization in Kenya. His sexuality is not concealed; it informs his academic work.

We cannot state definitively that Ahmed was openly gay in 2009 when he married Ilhan. What we can say is that a man who has since publicly identified as gay marrying a woman in Minneapolis in 2009 for reasons of romantic love is, to put it mildly, an unusual proposition. The balance of evidence is compelling: Ilhan married Ahmed for reasons other than romantic interest or purposes of starting a family.

Further evidence that the Elmi marriage was a sham comes from Ilhan Omar’s concurrent relationship with Ahmed Abdisalan Hirsi. Ilhan and Hirsi had entered into a religious marriage — a nikah — in 2002, years before the Elmi marriage, and had two children together. Throughout the entire period of her legal marriage to Elmi — from February 2009 to December 2017 — Ilhan appears to have lived with Hirsi as her partner. Address records compiled by Steinberg place all three — Omar, Elmi, and Hirsi — at the same Fargo, North Dakota address in August 2009, six months after the marriage. While still legally married to Elmi, she had a third child with Hirsi. In 2014 and 2015, also while legally married to Elmi, she and Hirsi filed joint federal tax returns — a filing status available only to legally married couples. The Minnesota Campaign Finance Board, which uncovered the issue during a separate investigation, said the returns needed to be corrected and ordered her to repay campaign funds spent on them and to pay a penalty. She legally married Hirsi in January 2018, one month after the Elmi divorce was finalized. The available evidence suggests that throughout the eight years of her legal marriage to Ahmed Elmi, Ilhan Omar was in every practical, domestic, and financial sense the partner of Ahmed Hirsi, not Ahmed Elmi.

Ilhan Omar has consistently denied the allegations of marrying her brother. In 2016 she described them as “disgusting” and “absurd.” In her 2017 legal divorce filing, she swore under oath that she had had no contact with Ahmed since June 2011 and did not know how to reach him. That sworn statement sits uneasily alongside several documented facts. First, Ahmed reportedly remained enrolled at NDSU until 2012 — after she says contact ended. Second, Steinberg found Ahmed’s name and Instagram username, @ahmednelmi, embedded in the code of the website for Sahra Noor’s company, Grit Partners — evidence, corroborated by the Daily Caller News Foundation, that he helped set up the company’s online presence in January 2019, nearly eight years after Ilhan swore she had lost touch with him. Third, Omar swore she did not know how to reach Ahmed. He maintains a publicly listed institutional profile with his email address at the University of Bristol, as well as active LinkedIn and Substack pages — findable by anyone with internet access in under a minute. By no means is he lost or inaccessible. He is an academic with a necessary public presence. Omar’s statements regarding Ahmed are not supported by the facts.

The immigration fraud case rests not only on the nature of the marriage but on what followed it. Ahmed received a conditional, marriage-based green card. Under standard USCIS rules, the conditions must be removed around the second anniversary of the green card — roughly 2011, the same year Ilhan says the relationship ended. The coincidence of dates is convenient: by claiming the relationship ended in 2011, Ilhan had a ready explanation for why no joint petition to remove the conditions was filed. Ahmed left the US in 2012, having obtained what the marriage provided: residence in the United States and a US college education.

The 2011 date was first established publicly in a written statement Omar issued in August 2016, when the brother allegations surfaced during her Minnesota legislative campaign. At the same time, she was paying immigration lawyers with campaign funds. According to records from the Campaign Finance Board’s investigation, those lawyers filed Freedom of Information Act requests with USCIS, and their timesheets reference the I-130 and I-751 — the forms tied to obtaining a marriage-based green card and making it permanent. The board ordered the improperly spent campaign funds repaid. The simultaneous public establishment of the 2011 separation date and the legal examination of the underlying immigration documents is circumstantially damning: it suggests not a casual biographical clarification but a coordinated legal strategy.

Ahmed did at some point apply to make his green card permanent. According to the Washington Post, USCIS requested additional evidence because of concerns about the validity of the marriage, and Ahmed withdrew the application rather than provide it — again consistent with a sham marriage.

What remains missing is the definitive proof: DNA. If Ilhan Omar wants to clear the air and disprove the accusations against her, all she needs is a DNA sample along with one from Ahmed. He’s not hard to find: he maintains a public academic profile, with his email address listed, at the University of Bristol. With her career, her citizenship and possibly her liberty at stake, a single email would seem a small price to pay. That Omar has not made it speaks for itself. On the evidence, Ilhan Omar married her brother.

A note on sourcing: This piece draws on Hennepin County marriage records; UK Companies House records; a certified UK marriage certificate obtained by the New York Post; open-source investigative research by David Steinberg, including address records and website code corroborated by the Daily Caller News Foundation; on-record testimony from Abdihakim Osman reported by the Daily Mail; Minnesota Campaign Finance Board findings and investigation records; reporting by the Washington Post on USCIS records; the University of Bristol’s public researcher profile; and Ilhan Omar’s own public statements. The investigation is ongoing and further documentation may emerge.

Ilhan Omar: Part III - The Potential Penalties

In the two previous analyses, we examined the basis for the claims that the name Ilhan Omar is an alias, adopted through an immigration fraud by her father, and that Ahmed Nur Said Elmi was not only her husband but also her brother. In this analysis, we consider the consequences she may face.

Before that, however, let us dismiss certain misconceptions about the use of her name and birth date. Much online commentary holds that Omar is living under a fake name and thereby committing perjury or fraud. As far as the US government is concerned, her legal identity is the one on her immigration and citizenship documents: Ilhan Omar, born October 4, 1982. That is not merely a name she is permitted to use. It is the only name, and the only birth date, she may use for official purposes. Until a court determines that the immigration record on which her identity rests was false in substance, she is legally Ilhan Omar. She faces no penalty for using that name or that birth date, whatever she may call herself privately. Her exposure arises only if the record itself was obtained by fraud, or if she restated it on forms signed under penalty of perjury knowing it to be false.

Nor was Omar a bigamist, as is sometimes claimed. In 2002 she married Ahmed Hirsi in an Islamic religious ceremony that was never legally registered. Minnesota abolished common-law marriage in 1941, and an unregistered religious ceremony does not create a legal marriage there. When she married Ahmed Nur Said Elmi in 2009, therefore, she had no legal spouse. She lived with Hirsi before and after her marriage to Elmi, and had a child with Hirsi while still legally married to Elmi. The evidence suggests she remained functionally Hirsi’s wife the entire time, but that was not a second marriage in law. As a legal matter, she was not a bigamist.

Nor does her marriage to Ahmed present a risk of penalty today. If Ahmed is her brother, the 2009 marriage, though legally valid on its face, could not have been bona fide in the sense immigration law requires. The marriage evidently yielded him a conditional, marriage-based green card, and a marriage entered into to evade immigration law is punishable by up to five years in prison and a $250,000 fine. But prosecution for the marriage itself is very likely time-barred. The general federal statute of limitations is five years; the marriage took place in 2009, and the couple divorced in 2017. Any false statements in the original immigration petition would be equally out of reach. The risk lies only in what she may say or do now. A knowingly false statement to federal investigators about the marriage, or any recent coordination with family members to conceal the relationship, would be a new offense.

Her real exposure lies in her citizenship. Omar did not naturalize in her own right. She acquired citizenship in 2000 through her father’s naturalization, in which, according to records, she was listed as a minor aged 17.

Her citizenship can be challenged in two principal ways: through her father, or through her age.

The first path runs through her father. If a court found that his naturalization was obtained by fraud, including by applying under a false identity, the law provides that anyone who derived citizenship through him loses it as well. As a practical matter, then, a fraudulent application by her father would nullify Omar’s citizenship. Strictly speaking, she would not be denaturalized, since she never naturalized in her own right, but the effect would be the same. That outcome would require a determination by a federal court, not an immigration agency, and the burden would rest with the government to meet the standard of “clear, unequivocal and convincing” evidence, higher than in an ordinary civil case though below the criminal standard of proof beyond a reasonable doubt. The father’s file has been examined before. According to the Washington Post, a 2019 federal review found no problems with her naturalization, and immigration investigators concluded at the time that there was insufficient evidence to pursue the matter. The current investigation is no doubt revisiting that conclusion.

The death of Ilhan Omar’s father raises the bar for such a challenge. He died in June 2020, and denaturalization has historically been a lawsuit against a living, naturalized person. That is, the statute directs that suit be brought where the naturalized citizen resides, language that implies a living defendant. Whether a deceased person’s naturalization can be revoked appears never to have been decided. Nothing bars the government from trying such a case, but it would likely set a precedent, and how a court would rule is therefore uncertain.

The second path is Omar’s age, and it is the simpler one. Under the law then in force, a child derived citizenship from a naturalizing parent only if, among other conditions, she was under 18 at the time of the parent’s oath. If Omar was already 18 when her father took the oath, she never met the conditions for derived citizenship and never became a citizen. Strictly, this is not denaturalization, because there is no naturalization to revoke. Nor does it require proof of her father’s intent or a lawsuit against a dead man. It turns on a single fact: her true date of birth relative to her father’s oath date. The burden of proof may also run the other way. In removal proceedings, a person born abroad is presumed not to be a citizen, and Omar would have to prove her derived citizenship by a preponderance of the evidence. Her passport would weigh heavily in her favor, but if the government produced records indicating an earlier birth date, the burden of rebutting them would fall on her.

Pursuing it would not require a court at the outset. Immigration authorities can cancel a certificate of citizenship obtained illegally or fraudulently, and the State Department can revoke a passport if it concludes the holder is not a citizen. Either step would shift the burden to Omar to prove her citizenship. The final word would rest with a federal court.

What would decide it are the records created as the family moved through the system. The most important likely are the family’s registration with UNHCR at the Dadaab camp in Kenya in the early 1990s; the refugee case file prepared for its admission to the United States in 1995, along with each family member’s immigration file; her father’s naturalization application, which would list his children’s birth dates; and the UK Home Office files of her siblings in Britain, whose recorded birth dates would constrain her own. Investigators can obtain all of these. One further record deserves particular mention, although it may not exist at all. If her father first applied for US refugee status under the family’s true name and was rejected, that earlier application would likely record the children’s original birth dates, before any later changes. Given the question surrounding her age, it could prove the single most valuable document in the case.

Somalia itself is a less promising source. No pre-1991 Somali birth, school, hospital or military records for the family have been publicly produced. Foreign governments have assessed that most Somali records were destroyed or rendered unretrievable in the 1991 civil war. That does not mean such records no longer exist: some may survive in uncatalogued government storage or in private hands. The Barre government’s official bulletins from 1950 to 1989, recently digitized with Italian assistance, might also record her father’s military appointments under his real name. And officers, relatives and neighbors who knew the family before 1991 could still attest to the children’s names and birth order. Nonetheless, recourse to Somali records, even with a friendly government now in power in Mogadishu, could pose a considerable challenge.

Until 2019, both the Minnesota Legislature’s website and Congress’s Biographical Directory, which is ordinarily compiled from information supplied by members’ own offices, gave Omar’s birth date as October 4, 1981. Her office had both changed to 1982 months after she entered Congress, shortly after a video questioning her age circulated online. No documentation supporting the change has been made public. These listings are not primary evidence and would not by themselves nullify her citizenship. But should other documentation emerge recording a 1981 birth, they would almost certainly be introduced to corroborate it. They would not be the coffin, but they could well be the nails.

Loss of citizenship would leave her position weaker than it first appears. Omar was admitted to the United States in 1995 as a child on her father’s refugee application, and her permanent residence rests on it. If his application was fraudulent, her green card would be tainted as well, and she might never have been lawfully admitted for permanent residence. That would also undermine her citizenship independently of her age, since a child derived citizenship only if she was a lawful permanent resident. Removal proceedings require the government to charge a specific ground, but if her status was void from the start, one would be readily available, without any need to show that she personally committed fraud as a child. Her defense would then turn on the forms of relief open even to those without status, which are discretionary and far from assured.

Her seat in Congress is a separate matter. The Constitution requires seven years of citizenship for House members. If Omar is found not to be a citizen, she would be ineligible to serve. But the House alone judges its members’ qualifications, and removing a sitting member requires a two-thirds vote to expel. No court can remove her.

Finally, Omar could face criminal charges for false statements, though these are derivative. A perjury or false-statement charge over a recent passport application would rest on the same proof as the case against her citizenship: that she was born earlier than the date her father gave under oath, and that she knew it. Her public denials, including her answer of “not to my knowledge” when asked whether she is related to Ahmed, are not crimes, however misleading, because they were made neither under oath nor to federal officials. A knowingly false statement to federal investigators, or under oath before a grand jury, would be a different matter, punishable by up to five years in prison. In a criminal investigation, however, she can simply decline to answer. The pressure would shift instead to any civil or immigration proceeding over her citizenship. There, unlike in a criminal case, her silence may be taken as evidence against her. To defend her citizenship she would have to testify under oath about her birth date, her father and her marriage, where any false answer would be perjury. If she declined, the court could infer that the truthful answers would not help her. She would be caught in a vise: testify and risk perjury, or stay silent and risk losing her case.

Timing may matter as much as evidence. Omar’s best strategy is to run out the clock, much as Donald Trump himself did with the criminal cases against him before the 2024 election. A contested citizenship case, with a federal trial on the disputed facts, appeals and any removal proceedings, could easily take longer than the two years and three months remaining in Trump’s term, which ends in January 2029. A Democratic successor would very likely drop the case. Even a Republican successor might conclude that pursuing the deportation of a sitting congresswoman is not worth the political cost. The calculus is not entirely one-sided: a final judgment revoking her citizenship, once entered, would not simply disappear with a change of administration. But a case still in progress in January 2029 would be at the mercy of the next president’s priorities.

To sum up: our findings support the conclusion that Omar’s father entered the United States under an assumed name. The evidence also strongly suggests that Omar entered into a sham marriage with her brother. That charge, while politically damaging, presents no real legal jeopardy for her today.

The father’s application is another matter. If Omar’s own refugee admission and green card rested on her father’s fraudulent application, she may never have been a lawful permanent resident, and so could never have derived citizenship, whatever her age. That argument can be made in her own proceeding, where the burden would fall on her to prove her citizenship. It would be contested, since she was a child when the family arrived, but it would draw on the same evidence of her father’s identity.

The government’s most direct short-term prospect, however, is to produce a document establishing that Omar was in fact born in 1981, not 1982. Were that to happen, her legal status in the United States would be thoroughly undermined, and she could be deported within the remaining term of the Trump administration. Absent such a document, the proceedings will take time, possibly enough that, by the time a decision is reached and carried out, the political environment in Washington may have changed. She may be saved by the electoral bell, so to speak.

Ilhan Omar is in serious legal trouble, but she is far from down and out.

___________________________________________________________

A note on sourcing: The author is not a lawyer, and this analysis does not represent legal advice. Instead, it is intended to serve as an overview and summary of the case against Ilhan Omar, the evidence supporting that case, and the penalties she could face. It draws on the text of 8 U.S.C. §1451 and related statutes; the Supreme Court’s decisions in Fedorenko v. United States (1981), Kungys v. United States (1988) and Maslenjak v. United States (2017); the Justice Department’s October 21, 2026 filing in the U.S. District Court for the District of Columbia; 2019 emails of the Minnesota Legislative Reference Library obtained by the New York Post; and reporting by the Washington Post, Axios, The New York Times, Fox News and the Washington Times.

What's the Hormuz Toll Worth?

The Hormuz toll is worth about $500 billion to Iran on a present value basis.

Most recent analyses have anticipated that Iran would charge a toll of $1 / barrel or a maximum of $2 million per vessel to cross the Strait of Hormuz. At 20 mbpd of crude oil and refined products peacetime exports through the Strait, this amounts to, in round numbers, $20 million / day or $7.5 bn / year. All things considered, this would not meaningfully alter Iran’s financial situation nor the fundamental nature of negotiations to end the war.

For purposes of an agreement with Iran, however, the underlying economic value of the toll should be the prime consideration. And this is large.

The media tends to focus on tankers, but in fact several types of vessels use the Strait, including crude and refined product tankers, container ships, bulk carriers and specialized vessels like LNG (liquefied natural gas) and LPG (liquefied petroleum gas) carriers. All of these are likely to be subject to tolls, sooner or later.

Collectively, crude oil, refined products like gasoline and diesel, as well as liquefied natural gas (LNG) and liquefied petroleum gas (LPG) represent $600 bn in annual exports from the Gulf.

This is, however, small change compared to the value of goods imported in containers. This is estimated at $1.2 trillion, twice energy exports by value.

Bulk carriers and specialty tankers represent the balance, but these do not materially change the total of nearly $2 trillion in laden vessels entering and exiting the Strait annually.

Iran, if it is allowed control over the Strait, would be in a position to toll all of it.

Current Iranian pricing be should not be deemed indicative of tolls after any agreement is signed. Monopoly service providers — and that is what Iran would be with respect to passage through the Strait — inevitably raise their rates to the level the market will bear. There are different ways to set prices, depending on how much political friction and alternative route development the Iranians are willing to tolerate.

We estimate a ‘friendly’ toll at 11-13% of the value of energy exports, equivalent to $10 / barrel of oil equivalent. With such a toll, the oil exporters would still make hefty profits. A $10 / boe toll on energy exports would net Iran nearly $80 bn in toll revenues per year.

Container ships promise hefty returns as well. A 5% toll on the value of cargoes — a kind of tariff, to be more familiar to readers — would net Iran $60 bn in annual revenues.

In all, our estimates put Iran’s potential Hormuz toll revenues at nearly $140 bn per year.

Iran’s 2025 GDP in US dollar terms is estimated by various sources in the range of $350-420 bn. In other words, prospective toll revenues would exceed one-third of Iran’s GDP as measured in US dollar equivalents. This sum would be transformative to the Iranian economy.

For negotiating purposes, one might value the toll at three times its annual value — a three-year payback period is a common ‘rule of thumb’ — which would imply Iran opening negotiations with a target value around $500 billion for waiving its rights to the Strait.

Given the sums involved, the hope that Iran will accept, say, $20 bn or just the lifting of sanctions for waiving control of the Strait is unlikely to be realized.

If the Trump administration is finding that its offers are being rejected one after another, it’s time to wake up and recognize underlying realities. A toll on the Strait of Hormuz has immense value to Iran. Any agreement to cede control over the Strait will have to provide commensurate compensation.

The Ghalibaf Equation: Iran's Negotiating Tactics

Last week, Mohammed Ghalibaf, the Speaker of Iran's Parliament (the Majlis), posted a threat to the US in the form of an equation. It provides critical insight into Iranian leadership's thinking.  The post: 

If you're a layman, or anyone in the Trump administration, Ghalibaf's post probably does not mean much to you.  But if you understand oil markets, it tells a great deal about Iranian assumptions and negotiating tactics.  

In the post, SOH is the Strait of Hormuz, which Ghalibaf describes as partly played. The Strait is materially closed, but a few ships are still getting through.  Even that could be reduced a bit further.

BEM is the Bab el-Mandeb Strait at the southern exit of the Red Sea (see the map below). The Houthis control the approaches to this chokepoint. It is listed as unplayed — Iran has not yet directed the Houthis to close it. If it were closed, Saudi Arabia's East-West Pipeline exports could not reach Asian markets. The largest tankers cannot transit the Suez Canal at the Red Sea's northern end, making the Bab el-Mandeb exit essential for loading VLCCs (very large crude carriers) bound for Asia.

Pipelines refers to the Saudi East-West Pipeline and the UAE's Fujairah bypass pipeline. Both are listed as unplayed. The Saudi pipeline currently carries approximately 4-4.5 million barrels per day for export at the port of Yanbu on the Red Sea — the primary bypass route for Saudi crude avoiding Hormuz. The UAE's Habshan-Fujairah pipeline carries approximately 1.5-1.6 million barrels per day to the Gulf of Oman, bypassing Hormuz entirely. Both are potential targets. 

These are designated as unplayed cards. Ghalibaf is implicitly threatening an Iranian attack on Saudi and UAE pipeline exports in retaliation for any US or Israeli strike, putting an additional 6 mbpd – 6% of global consumption – at risk.  If fact, at writing on May 4th, Iran had struck the Fujairah Oil Industry Zone in the UAE, partially playing that card, as Ghalibaf might say.

On the demand side of the equation, the cards are not Iran's to play. They are market forces already operating in Iran's favor.

Inventory release is listed as played. Oil prices have remained comparatively contained because governments and commercial players have been releasing crude and refined product inventories on the assumption that Hormuz would shortly reopen. That assumption is increasingly untenable. Inventories are drawing down toward operating minimums. The release card is nearly exhausted.​ By the end of May at the latest, ​it will not be possible to sustain oil consumption levels using inventory draws.  ​

Demand destruction — reduced oil consumption — is listed as partly played. When inventories can no longer cover demand, prices must rise until consumers reduce fuel purchases. Rationing is already emerging in parts of Asia and Europe. In the United States, the demand destruction threshold — the price at which consumers materially change their behavior — is approximately $5.50 per gallon at the pump, compared with $4.46 per gallon at writing. At the current pace of oil price increases, WTI will reach approximately $160 per barrel around Memorial Day. That puts US pump prices above $5.50 per gallon entering the summer driving season, right at the oil shock threshold for the economy.

Which is precisely what Ghalibaf means by his closing line. Summer vacation is the seasonal demand surge that amplifies the right side of his equation without Iran needing to do anything. He is pointing out that the calendar is working in Iran’s favor​ for the next ten weeks or so.

As the graph above from JP Morgan shows, Ghalibaf's analysis is largely in line with that of most oil market analysts.  We know, therefore, that Ghalibaf has a quantitative feel for oil markets. Specifically, Ghalibaf's equation indicates that oil prices will continue to rise and become untenable for the US during the summer driving season.  Consequently, the Iranians are willing to wait, because they believe time is on their side in the short to medium term.

Nevertheless, Ghalibaf and others want to end the conflict in the short term.  First, blockage is obviously painful for Iranian society and a risk for Iranian political stability.  Renewed conflict also risks death and destruction.  Finally, closure of the Strait is destructive to global society.  While the plight of Filipino farmers and Thai office workers may not register at the White House, Ghalibaf appreciates it.  He is a certified Airbus pilot, a former mayor of Tehran, and a college professor.  The people in these roles are typically highly intelligent and responsible.  A person like Ghalibaf cannot sit on a closed Strait and not comprehend the economic destruction cascading around the globe.  (This will not be true of all Iranian leadership, to be sure.) I believe the continuing variety of proposals coming from the Iranians reflects, in part, an understanding of the global stakes.

Finally, a word on timing.  Many commentators insist that Iran is about to collapse and the US is winning. This view currently rests on two premises: 1) the blockade is working and Tehran is bankrupt, and 2) Iran is reaching tank tops on crude oil storage. If the tanks fill, oil wells will have to be shut in and may never return to production, or at least not to current levels. By extension, this implies either that Iranians will rebel and overthrow the government or that the government will become too weak to control the Strait of Hormuz.   Outsiders have limited access to Tehran's financial data and conditions, but historically, blockades have taken years to work, if at all.  Further, Iran has shut in wells before, and these came back on line much faster than analysts predicted at the time.  Neither of these is a compelling argument that the Iranian regime is somehow days away from collapse.  But if one believes it, then the US can afford to wait and let the Iranians beg for a deal.  

On the other hand, if this view is in error, the Trump administration will face catastrophic economic conditions within weeks and be forced to either 1) ration gasoline and make US drivers wait in line, as was the case in 1973-1974; 2) begin a major ground invasion of Iran, which would require 6-12 months of preparation and Congressional approval; or 3) conclude a highly unfavorable deal with Tehran.  The latter option seems the most likely.  Indeed, if US drivers are forced to wait at gasoline stations, the Iranians might expand their demands to include the resignation of Trump and Netanyahu.  Rest assured, someone as smart as Ghalibaf has already entertained the possibility.  

I sense my agreement concept from March 27th is still sound.  The Iranians would agree to terms sketched out there within a week or so.  On the other hand, that leaves the theocracy in place.  Those looking for regime change will find their best alternative here.  

The 12 Amendments: Regime Change in Iran

This document lays out a vision for regime change in Iran based on constitutional reform.  The US administration will find this a challenging approach, but the rewards are great.

The Problem with Regime Change

The United States and Israel both declared regime change as a key goal at the outset of the Iran conflict. The results have been instructive in what does not work. Bombing eliminated the incumbent leadership but produced more radical successors. Demands for unconditional surrender and the right to name Iran's new leaders were rejected. A naval blockade of the Gulf of Oman has imposed economic pain without producing political capitulation.  Iran has not been starved into submission.

The Israeli prescription for regime change has settled on a strategy of periodic intense bombardment — of military assets, governance institutions, and civilian infrastructure — designed to destroy Iranian organizational capacity and return to bombing whenever recovery appears imminent. Known colloquially as “mowing the grass”, this is the Gaza model applied to a country of 90 million people. It is a strategy for destruction, not transformation.

Most Americans understand regime change differently — as the replacement of a dictatorship with a functioning democracy. On that definition, the administration’s current approach offers no path to success. Bombing does not produce democracy. Blockades do not write constitutions. If the goal is a democratic Iran that no longer threatens its neighbors, finances proxy armies, or pursues nuclear weapons, a different instrument is required.

Iran's Democratic Foundation

Iran has something that most countries targeted for regime change do not: a functioning elected parliament. The Majlis — Iran's 290-member legislature — has operated continuously since 1980, holds genuine elections, and produces real political competition within its constrained space. It is the institutional foundation upon which a functioning democracy can be built without starting from scratch.

The current Speaker of the Majlis is Mohammad Bagher Ghalibaf — the key figure who led Iran's negotiating delegation in Islamabad on April 10 (since removed). Ghalibaf is a former mayor of Tehran, a certified Airbus pilot, a professor at the University of Tehran, and a four-time presidential candidate. He is a pragmatist by the standards of the Islamic Republic and has demonstrated willingness to engage with the United States when the incentives are right. He is also a man who has watched two consecutive IRGC commanders killed by Israeli missiles in the past year. Ghalibaf understands the stakes.

The Majlis is the counterparty for democratic transformation. Its 290 members represent genuine constituencies with genuine economic grievances. And under the National Prosperity Fund framework, described separately, those 290 members would receive $500,000 per year in direct payments tied to continued economic normalization — giving them strong personal financial incentives to support constitutional reform. 

The Theocratic Obstacle

In addition to the Majlis, Iran has another, dominant layer of governance.  Iran's 1979 constitution designated the Supreme Leader — now Ayatollah Mojtaba Khamenei, wounded and partially isolated following Operation Epic Fury — as the supreme authority over the military, judiciary, state media, and all major policy decisions.  His word is decisive.

He is supported by the Guardian Council, whose six senior members are Supreme Leader appointees.  The Council vets all candidates for office and vetoes legislation it deems contrary to Islamic law. Together, the Supreme Leader and the Guardian Council have systematically blocked democratic expression for forty-five years.

The most dangerous theocratic force is the Islamic Revolutionary Guard Corps — Iran's Praetorian Guard. The IRGC controls Iran's intelligence apparatus, missile programs, and an estimated 40-50% of the Iranian economy through its construction conglomerates, energy interests, and black-market networks. It finances and directs Hezbollah, the Houthis, and Iraqi militias. Two consecutive IRGC commanders have been killed by Israeli strikes in the past year — Hossein Salami on June 13, 2025, and Mohammad Pakpour on February 28, 2026. Ahmad Vahidi, the current commander, is engaged in what appears to be a palace coup — limiting access to the injured Supreme Leader and positioning the IRGC as the dominant power in the current vacuum.

The IRGC is the primary obstacle to reform. It stands to lose the most in a democratic transition.  At the same time, it has no answer to Iran's structural economic crisis — 40-45% annual inflation, currency collapse, 80% state ownership, price controls, and the kind of institutional exhaustion that preceded the fall of communism in Eastern Europe. Its leadership knows the current system is failing. That knowledge is a source of both danger and opportunity.

The Constitutional Solution — 12 Amendments

A democratic Iran does not require a new constitution. It requires specific modifications to the existing one. Twelve articles stand between the Iran that exists and the Iran that is possible. If passed by a Majlis supermajority, these 12 amendments would convert Iran from a theocratic dictatorship into a constitutional theocracy — a system with historical precedent, theological grounding in Shia jurisprudence, and genuine democratic substance. The resulting constitutional structure follows established international precedent:

—   The Supreme Leader becomes the head of nation and the faith, with ceremonial authority, but no governing power, analogous to the British monarch

—   The President becomes the ceremonial head of state, appointed by Majlis vote rather than popular election, analogous to the Hungarian or Italian president — above partisan politics, without governing authority.

—   The Speaker of the Majlis becomes Prime Minister, the head of government, elected by Majlis. He governs through Cabinet on all executive matters including budget, economic policy, foreign affairs, and defense. This is standard parliamentary democracy.

—   The Majlis is the sovereign legislature, Iran’s parliament with all rights and duties implied

—   The Guardian Council is reconstituted as the supreme court, reviewing legislation for constitutional conformity only. Members appointed through parliamentary process. No Islamic law veto. No candidate disqualification. 

This is not the only possible model. But it is a coherent, achievable, and historically grounded one.

Why This Works

The Majlis has every reason to say yes

For the 290 members of the Majlis, the 12 Amendments is an offer that transforms their institutional position from a constrained rubber stamp into a genuinely sovereign parliament. Combined with the NPF's $500,000 annual payment per member, the personal and institutional incentives are aligned. Ghalibaf, who has sought the presidency four times and been blocked each time by Guardian Council interference and Supreme Leader preference, becomes Prime Minister under the new system — the governing head of state of a normalized Iran. The proposal converts his political ambitions from a source of frustration into a path to genuine power.

The Iranian public is ready

Iran's protest movements — 2009, 2019, 2022-2026 — have demonstrated consistently that a substantial portion of the Iranian public wants exactly what the 12 Amendments offers. The missing ingredient has always been a specific, achievable constitutional program rather than the vague call to "rise up." The 12 Amendments gives protesters, reformists, and ordinary Iranians a concrete agenda to organize around, specific articles to demand, and a named counterparty — the Majlis — responsible for acting. Six years of 40%+ inflation, currency collapse, and institutional failure have created a population with strong material incentives to support economic and political normalization.

The IRGC faces a credible threat

The IRGC will resist. Its entire institutional existence — economic empire, proxy network, political dominance — depends on the current system. But resistance carries a cost that has recently become concrete. Two IRGC commanders have been killed by Israeli missiles in the past year. Ahmad Vahidi, the current commander, is acutely aware that his predecessors' titles did not protect them. The US and Israel can credibly extend that threat: pass the 12 Amendments, or face the same targeted pressure applied to those who actively obstruct democratic transition. No need to bomb bridges and powerplants — just remove the specific individuals who stand in the way of a reform that serves Iranian, American, Israeli, and global interests.

This is not a threat that needs to be spelled out in diplomatic communications. It is a background reality that every IRGC commander already understands. Combined with an Iranian economy that the IRGC cannot fix and a Majlis that is financially motivated to move, the institutional calculus shifts.

Europe and the American public can support this

A proposal to transform a dangerous theocratic dictatorship into a constitutional democracy through specific constitutional amendments — rather than through bombing civilian infrastructure — is a proposal that European allies and the American public can endorse. It reframes the Iran conflict from a destructive military campaign into a constructive democratic transformation. President Trump, whose public support on the Iran war is weak, gains a historic achievement — the democratization of Iran — rather than an inconclusive military campaign. The political upside is significant.

The Ask

The ask is simple and specific. The United States and its allies call on the Majlis of the Islamic Republic of Iran to pass, by supermajority, the 12 constitutional amendments described above within a defined period — 90 days from ceasefire. The Majlis Speaker, Mohammad Bagher Ghalibaf, is identified as the responsible counterparty. The economic benefits of normalized relations — sanctions relief, frozen asset releases, the Gulf Stabilization and Reconstruction Fund, and NPF payments — are explicitly linked to Majlis action on the amendments.

IRGC commanders and Guardian Council members who actively obstruct the Majlis's exercise of its constitutional authority face targeted individual consequences. Those who stand aside face no consequences and receive NPF payments on the same basis as other designated decision-makers.

This is not a simple approach. It requires the United States to assert a position and hold it over weeks to months. It requires sustained engagement with the Majlis as a democratic institution, sustained pressure on the IRGC as an obstacle to reform, and sustained commitment to the economic normalization that makes the reform agenda viable.

A democratic Iran is an enormous strategic prize — one that resolves the nuclear threat, ends the proxy war, reopens Hormuz, and removes the primary source of regional instability. It represents an opportunity that arises once in a century. The 12 Amendments is the most direct path to that outcome available.

 *****

The 12 Amendments: Regime Change in Iran

*****

Princeton Policy Advisors is an independent policy advisory firm. This paper represents the analytical views of its authors and does not reflect the official position of any government or institution.

Iran: An OPEC of One

President Trump appears to be preparing a declaration of victory and an exit from the Iran conflict — one that would leave Tehran in uncontested control of the Strait of Hormuz. This would be a strategic catastrophe of the first order.

Control of the Strait is not merely a military prize. It is an economic chokepoint through which roughly 20 million barrels of oil pass every day. An Iran that controls that passage without challenge controls, in effect, the production quotas of every Gulf exporter without an alternative outlet—and by extension, global oil prices. OPEC has spent fifty years trying to achieve what Iran would acquire overnight.

The math is stark. At a toll of $30–40 per barrel on 20 million barrels per day, Iran's daily revenue from the Strait alone would approach $800 million — nearly $300 billion annually, equivalent to 60 percent of Iran's entire current GDP. 

Unlike OPEC, which has always struggled with cheating among its members, Iran ​could enforce discipline with absolute authority. Any producer that exceeded its quota would face an immediate and credible threat of closure. At a target price of $120 per barrel, Gulf exporters would still receive $80 ​/ barrel — more than they have seen recently. They may well acquiesce.​ Oil prices will never return to pre-war levels under such a regime.

It gets considerably worse. Iran and Russia together would effectively control ​t​wo-thirds of global oil exports. That is not merely an economic position—it is a geopolitical weapon of the first rank. Tehran could close the Strait in response to an Israeli military action, a Western sanction, or any provocation it chose to define as such. It could demand the resignation of a government. It could hold oil flows hostage to the terms of the Ukraine war. Western Europe, wholly dependent on imported oil, would find itself negotiating its energy security with Moscow and Tehran simultaneously.

Israel's position would be particularly precarious. Any strike on Iranian nuclear facilities would invite immediate Strait closure, with reopening conditional on Israeli reparations and facility reconstruction. The nuclear deterrent that Israel has relied upon for decades would be neutralized by an economic one.

And Iran would not stand still. Flush with toll revenues, Tehran would rearm at scale—acquiring the best missiles, drones, aircraft and naval vessels available outside the American arsenal. Within a year, Iran's military would be materially stronger than it​ was before the war.

President Trump should disabuse himself of the notion that walking away from this conflict while the Strait remains closed is a viable option. It is not. The choice is among three paths: unconditional withdrawal and the consequences described above; a full ground invasion for which there is no public appetite and no coherent plan; or a negotiated agreement. ​ You will find our version of a workable agreement here.

A Concept for Ending the Hormuz Crisis

The Hormuz crisis clearly needs a re-think.  This analysis represents our view of an agreement which could be quickly agreed by both the US and Iran.

To be clear, if the US can restore by force 75% of the pre-war flows through the Strait of Hormuz by April 15th – latest April 30th – then it should do so and not negotiate.  That simple. 

If the US cannot achieve that goal with a high degree of confidence, then every passing day strengthens Iran’s position, and the US must prioritize a quick deal over an optimal outcome.  This seems the case.  Time is of the essence.  The BBC has reported gas station lines in Sri Lanka, following rationing in Slovenia earlier.  Within a couple of weeks, rationing will spread more broadly in Europe.  By the end of May – but certainly before Memorial Day – expect it in the US.  For the next several weeks to months, the US and Israeli position will be steadily eroding. The US needs a deal now.

A quick deal implies making an offer the Iranians could plausibly accept today.  It therefore must be simple, attractive and easy to negotiate, that is, deferring topics that might require months or years to agree. 

Below, we present the Iranian and US positions and our view of a reasonable agreement.

Ceasefire Timing

The US has proposed maximalist positions.  It wants Iranian compliance before a ceasefire.  This seems implausible and therefore a waste of time.  Expect a deal and a ceasefire to be simultaneous.

The Nuclear Question

The US wants a commitment that Iran will never pursue nuclear weapons, that no material will be enriched on Iranian soil, that all enriched material will be delivered to Saba on a schedule to be determined by the parties and that Natanz, Isfahan and Fordow will be decommissioned or destroyed.  This is fanciful.  What if the Iranians say that they will consider it and welcome meetings to discuss during the summer?  The global economy will be in ruins by then.

The Iranians, of course, want no limits on their nuclear activities.  This, too, is a non-starter.  They know the US will not agree to that in blanket form.

Our proposal calls for Iran’s nuclear development sites of Natanz, Isfahan and Fordow to remain off-limits for the next three years.  No Iranian would be permitted to set foot on any of those sites for the duration of the agreement.  That will effectively limit nuclear progress in the interim but does not force Iran to make permanent concessions which it would reject without prolonged negotiations.  Sealing the three sites is a condition that is easy to understand, easy to monitor, and relatively easy to agree, because it is 1) time-limited and 2) does not preclude all nuclear work. Given the time required to restore operations after the agreement expires, Iran’s key nuclear sites will be out of action for about five years.  That may not be optimal, certainly for Israel, but it is better than nothing. 

Oil and Gas Sanctions

The Iranians want full immediate relief from sanctions.  The US proposes phased relief.  Three is nothing wrong with the US proposal, save that it may take weeks or months to negotiate.  Whatever the US proposes, Iranians must be willing to agree it within, say, one week.

Our proposal calls for effectively full relief immediately.  The Iranians will obviously agree and this relief will, in effect, count as a kind of reparations.  Full relief takes this item off the table as an obstacle to a quick re-opening of the Strait.  This applies to SWIFT sanctions as well.

Frozen Assets

The Iranians want their $100-$120 bn in frozen assets immediately released.  The US wants releases based on compliance milestones.  The Iranians are unlikely to accept delay in receiving at least some portion of their frozen assets.  We have proposed $25 bn released on signing; $25 bn on the first anniversary if Iran honors its commitments; and the balance released as a function of the National Prosperity Fund, more on which later.

Reparations

The Iranians want reparations.  The US refuses.  We believe that the Iranians will not open the Strait without material reparations, which the US cannot grant due to the requirement for Congressional authorization and domestic political realities. 

We finesse this issue through a Gulf Reconstruction and Stabilization Fund, a $90 bn vehicle funded by the Gulf oil and gas exporters and representing about two months of lost revenues (Lost Oil Months, or LOMs, as we call it).  The exporters will be unhappy, but the contribution is looks workable and the up-front cost is not unattainable.  

This allows the US to avoid the reparations issue, even as something like reparations are paid to Iran.

The Strait of Hormuz

The Iranians want to set up a toll across the Strait of Hormuz. This is unacceptable to both the US and the international community. The various forms of payment — the lifting of sanctions, the GSRF, and free oil exports — compensate Iran for agreeing to free transit across the Strait.

Proxies

Iran would like recognition of proxies like Hamas and Hezbollah.  The US will resist it.  We finesse this by offering that both sides will restrain their proxies – Hezbollah, Hamas and the Houthis on the Iranian side, and Israel on the US side – from aggressive actions for the life of the agreement, ie, three years.  This is really a stand-down agreement, rather than a permanent solution.  Tying the Hormuz Agreement to recognition of the various parties would take years.  The US does not have the time; it is best to keep the topic off the table.

The Iranians should also agree to withhold any military supplies, aid or support to Russia during the agreement.

Regional Security

Iran would like recognized control over the Strait of Hormuz and the eviction of the US from the region.  Neither will happen.  In truth, Iran does not require de jure recognition when it has demonstrated de facto control over the Strait.  If Iran insists on formal recognition, it will peg itself as a problem needing a solution, very possibly a military solution.  Given Iran’s control of the Strait in practice, formal recognition would not appear critical in this round.  Everyone now knows that Iran can close the Strait at will.

Regime Change and the National Prosperity Fund

Regime change can happen on three levels: personnel, systems, and incentives.  The US has attempted regime change in Venezuela and Iran by eliminating top leadership.  However, the underlying regimes remain in place in both countries. Only personnel have changed.  In Iran’s case, incoming Iranian leadership appears all of younger, more energetic and more radical than the late Ayatollah Khamenei. 

Many observers of both Venezuela and Iran were hoping that regime change meant a return to democracy, or at least a regime better aligned with western values.  It has not happened, and the Trump administration does not seem particularly interested in this outcome in either country.

Finally, and importantly, regime change can be achieved by changing behavior of existing leadership.  This can be accomplished through coercion, partly as has been achieved in Venezuela, or through altered incentives.   Our proposal focuses on changing incentives.

One of the striking features of Iran is its chronic economic under-performance.

Iran’s GDP per capita, in real terms, remains below its level of fifty years ago, towards the end of the Shah’s reign.  For purposes of international comparison, Turkey at that time had only 70% of Iran’s per capita GDP.  Today, it is 2.6x that of Iran.

By any reasonable measure, Iran’s economy has been woefully mismanaged since it became a theocracy in 1979. 

Instead of improving the condition of the public, leadership is militaristic.  Iran’s leadership defines that country’s prestige not by its own achievements, but in negative terms, in its ability to harm Israel in particular.

Our proposal seeks to provide a counter-weight by tying benefits from the agreement, notably releases of frozen assets and flows from the GRSF (above), to GDP growth.  The top 500 decision makers will be generously compensated to produce prosperity.  Prosperous countries can, of course, go to war, but most pariah states are poor.  For example, North Korea, Cuba, and Venezuela are grindingly poor compared to their neighbors or their historical prosperity.  A focus on growth almost by definition implies a tendency towards openness, rule of law, a respect for individual rights, and peace in international relations.  

This is the gist of our proposal, called the National Prosperity Fund, which seeks to encourage constructive behavior from Iran’s leadership by rewarding them for creating prosperity while not constraining policy options. 

Summary of Financial Benefits

In aggregate, the financial benefits to Iran are notable, cumulatively $400 bn over seven years if Iran abides by the agreement. 

Cheap, Fast or Good

In negotiating with Iran, the US will face that project management truism: “You can be on time, on budget, or on spec — pick two." Given the situation, the US needs a quick solution that is acceptable, even if the cost is relatively high.  That’s the essence of our proposal, one which opens the Strait, does not require reparations from the US, inhibits Iranian nuclear development, stops Iran from attacking Israel directly or with proxy forces, and does contain an element of regime change.  It may meet a minimum standard for the US.  Iran can also claim a win: It gains substantial funding, sanctions relief, an end to hostilities for the next three years and does not irretrievably compromise its nuclear ambitions, even if it puts the program on ice for a few years. 

On paper, both parties could live with this deal.

The Hormuz Agreement: A Concept Paper for Comment and Discussion

Hormuz Agreement Concept

Hormuz Agreement Concept - 23 March 2026

US Oil Consumption, Oil Spend / GDP, Recessions

The Coming Oil Shock Recession: A Primer

With the Strait of Hormuz closed, the press is full of discussions of 'oil shocks', and wild oil price forecasts are being tossed around.  What does it all mean?  And what’s an oil shock anyway?

Economic shocks arise from oil’s unique characteristics.  For practical purposes, oil in the form of gasoline, diesel and jet remains the monopoly fuel for transportation.  Moving people or goods, especially over longer distances or in quantity, requires oil.  Remove the oil, and neither people nor goods can move as much as before, contracting economic activity.  Oil is mobility, and mobility is fundamental to the functioning of the economy.

The 'shock' aspect refers to suddenness.  In some cases, adjustment can be gradual.  For example, oil prices were consistently high from 2011 to 2014, and OECD oil consumption fell gradually over that period.  In the current episode, the US will have to cede 8% of its oil consumption in April alone, and almost 10% in May.  Adaptation through efficiency gains over such a short period is impossible. Instead, people make do with less, and do so almost immediately.  For that reason, oil shocks tend to be coincident with recessions.  A sudden loss of oil immediately reduces economic activity, the very essence of a recession.  Expect Europe to be in recession during April, and the US to be in recession by May.

Has the oil shock already started?  Well, sort of.

Markets have three elements: supply, demand, and stocks (inventories).  If supply decreases, markets can be balanced by reducing consumption or, alternatively, by drawing down stocks.  So far, most of the adjustments appear to have come from inventory draws. 

Of course, this cannot continue much longer.  Our analysis suggests that advanced country (OECD) inventories will fall to about 57 days of cover by the end of the month. These are below customary level of 60 days for refiners and other oil market participants.  Consequently, the window to sustain consumption through inventory draws is closing.  By April, it will be effectively closed and adjustments will have to come from reducing consumption.

In Asia, the process has already started.  Poorer countries like India, Pakistan and Bangladesh are curtailing refiners, extending school holidays and moving to work-from-home and four-day workweeks.  Large-scale flight cancellations are beginning in long-haul markets like New Zealand. 

These curtailments and cancellations will expand and spread to Europe by the end of the month.  They will hit the US during April. 

Oil Prices

It is not hard to find stories about US resilience to oil shocks because oil consumption is only a small part of GDP and therefore not a problem.

This misses the point.  Global oil production will be down by 14% -- 14 mbpd – in April.  This loss of supply must be allocated to consumers around the world in some proportion.  Given that the US is 20% of global oil consumption, it will not be spared.  All other things equal, we might assume US oil consumption will fall by its pro rata share, about 2 mbpd, or 10%.

The question is therefore the oil price necessary to reduce US consumption by 10% over 60 days. 

While oil prices are high in recent terms, they are not particularly high by historical standards, nor are they high enough yet to materially dent consumption.  For example, from 2011 to 2014, Brent averaged $110 / barrel—$156 / barrel in inflation-adjusted terms—and global consumption grew by 3%.  Prices will need to go much higher to destroy demand.  

We can estimate the necessary oil price by a few different means.  The first is to look at historical oil shocks adjusted for inflation and growth of the US economy in the interim.             

With these adjustments, we can look to three prior shocks for guidance, notably the first modern oil shock of the Arab-Israeli War in 1973-1974; the Iran-Iraq war during 1980-1982, and the oil shock of the Great Financial Crisis of 2008.  Adjusted for inflation and GDP growth, these suggest oil prices in the range of $210-$330 / barrel at peak and a sustained price about $20 - $30 / barrel below that.

We can also estimate the price by surveying the public, even in small and informal samples.  Those I have interviewed said they would curtail their driving by 10% if gasoline prices doubled.  This suggests unleaded gasoline at $5.50 / gallon for the US average, and that is in fact our forecast for the end of April.  This equates to $175 / barrel of crude oil, a bit below the historical peak for prior oil shocks. 

Our average unleaded price for April is forecast at $4.50 / gallon.  Given that unleaded averages $3.90 / gallon in the US at writing, $4.50 / gallon is not at all inconceivable.

Recession

Oil shocks and recessions are essentially synonymous.  Reducing oil consumption reduces economic activity and a reduction in economic activity is a recession.  In the data, they occur simultaneously.

Is a recession coming?

The short answer is ‘yes’.  Historically, GDP has fallen by about a third of percentage decline in oil consumption.  If we assume US oil consumption will fall by 10%, then we might expect a recession with a GDP decline of 3%.  This is in line with prior oil shocks, particularly those of the 1970s, and a typical decline for recessions in general.  The public will experience it as a stiff and unpleasant downturn.  Recessions almost always are.

In any recession, the question is not only magnitude, but duration.  How long could the coming recession last?

The recessions of the 1970s oil shocks – the best precedent for the current crisis – lasted 6 to 16 months from peak to trough, per NBER dating.  We use the average of 12 months for our forecast.  If the crisis continues unabated, expect the US to fall into recession during April and the economy to continue to deteriorate through March 2027. 

Let me close with the customary disclaimers.  Our forecast assumes that the Strait of Hormuz remains materially closed.  It may open for any number of reasons, including successful US military action, the collapse of the Iranian regime and resistance, or policy decisions made by Iranian leadership. 

Further, our timing expectations may be off, but probably not by much.  In addition, the allocation of demand adjustments may prove more unequal than we expect.  The US may require smaller, and East Asia, for example, may require proportionally greater adjustments than we project.  Finally, these forecasts assume that the Saudi East-West Pipeline remains fully operational at 5.5 mbpd.  The Iranians will likely try to put it out of action.

For those interested in our current quantitative model, here it is:

Iran War: 25 mbpd at risk; Pipes, SPR don't help much

The press has generally reported that 20 mbpd, about 1/5th of global oil consumption, is at risk if the Strait of Hormuz in the Persian Gulf remains closed.  The numbers are potentially larger.  Further, don't expect either existing Middle East pipelines or releases from strategic petroleum reserves to materially change the picture.  

Let's do the math. 

Tanker Trade: Pre-war, about 22 mbpd (million barrels per day) of petroleum liquids transited the Strait of Hormuz.  Of this, about 14 mbpd was crude oil, and 5 mbpd was refined product like gasoline, diesel and jet fuel.  

In addition, 1 mbpd was natural gas liquids (NGLs) like propane, butane and ethane transited the Gulf.  NGLs are typically by-products of natural gas --not oil -- production and are rarely used for transportation.  

Finally, the equivalent of 2 mbpd of liquefied natural gas (LNG) transited the Strait in February.  LNG is natural gas which is cooled and compressed into a liquid state, allowing transport via specialized tankers.  LNG is used principally for power generation, home heating and cooking, and various industrial applications.  As with NGLs, LNG is not a transportation fuel.  

Pipeline Transport: Before the war, about 3 mbpd of oil was also transported from the Persian Gulf via pipeline.  

In total, about 25 mbpd of crude, products, NGLs and LNG were shipped from the Persian Gulf via tankers and pipelines immediately before the war.

Diverting Hormuz Flows to Pipelines

How much could pipelines offset the closure of the Strait of Hormuz?  The Saudi East-West Pipeline, with a capacity of 7 mbpd, runs to the port of Yanbu on the Red Sea.  In February, the pipeline carried less than 1 mbpd and thus would seem to have 6 mbpd of spare capacity.  However, Yanbu is thought to have loading capacity of only 4-4.5 mbpd; consequently, the pipeline's incremental export capacity probably does not exceed 4 mbpd.  

The UAE also has an export pipeline to Fujairah, just beyond the Strait of Hormuz.  This pipeline has a capacity of 1.4 mbpd, but was near full capacity in February.  

All the export pipelines together probably represent no more than 4 mbpd of incremental capacity in practice, that is, they would offset no more than 1/5th of the losses from the Strait of Hormuz.  

Spare Oil Production Capacity

To this we could add spare global oil production capacity of 4 mbpd.  However, all of this is materially located in the Persian Gulf.  As a result, there is no accessible spare capacity available.

Releases from Strategic Reserves

Finally, many countries have strategic petroleum reserves (SPRs).  For example, the US SPR contains more than 400 million barrels of crude.  Assuming all countries decided to deploy their reserves, the maximum theoretical SPR draw could reach 9 mbpd.  The actual number is likely much lower.  Most analysts surveyed by Rigzone projected SPRs to contribute 2-4 mbpd to supply, and even that with some delay.  

The Bottom Line

If the Strait remains closed, in the best case, oil exports could be redirected through spare pipeline capacity and supply could be augmented with SPR draws of 4 mbpd.  Even in this scenario, however, global supply would still be down 14 mbpd, representing 14% of global consumption.  By historical standards, this volume is three times that sufficient to induce an oil shock recession.  

Finally, there is a worst case scenario in which Iran not only blocks the Strait, but also succeeds in disabling the region's vulnerable export pipelines.  In such an event, even with SPR draws of 4 mbpd, global supply would lag demand by nearly 20 mbpd, or 19% of global oil consumption.

In summary, neither pipeline exports nor draws from strategic petroleum reserves will compensate for the closure of the Strait of Hormuz.  Not even close.  Indeed, the barrels at risk are greater than just those transiting the Strait.  Iran may well be able to knock out the Saudi East-West and UAE Fujairah pipelines, raising the total outage to 25 mbpd, nearly a quarter of global oil consumption.  

The Paris-based International Energy Agency (IEA) has described the closure of the Strait of Hormuz as the “largest disruption to crude supplies in the history of the global oil market." That is no exaggeration.  If the US military is unable to clear the Strait within the next 30 days, expect a crushing oil shock recession.

$7 Gasoline; WTI $200; Hegseth out?

Brent oil prices have blown through warnings of $100 oil, with panic at the White House over rising gasoline prices.  It can get so much worse.

Let's start with oil prices.  By recent standards, $100 Brent seems high.  But it has been much higher -- and for a long stretch.  From 2011 to 2014, Brent averaged $110 / barrel, $150 / barrel in inflation-adjusted terms.  Despite high prices, oil consumption still grew by 3% during that period.  If the Strait of Hormuz remains closed, global oil consumption will have to fall by 12.5% within months.  To achieve this outcome, we estimate that pump prices would have to at least double and possibly triple, that is, US regular unleaded would rise to $6-9 / gallon, equivalent to $180-$300 / barrel on a Brent basis.  

Further, the global economy has historically fallen into recession with oil shocks no greater than 4% of supply, that is, about 4 mbpd in current terms.  Closure of the Strait implies a loss of 12.5 mbpd, three times the threshold for a global recession.  Consequently, even if two-thirds of Persian Gulf flows could be restored, a global recession is still probable.  Moreover, oil shocks hit quickly, often sending the global economy into recession within 30 days.  Expect Europe to be in recession by April.

The reported panic at the White House is somewhat puzzling.  The closure of the Strait of Hormuz is quite literally the base case for any scenario involving a major war with Iran.  This risk has been well understood for decades and would have featured prominently in any advice provided by US intelligence or the military to Defense Secretary Hegseth and President Trump --  likely many times in both written and verbal form.  Further, such advice would also have noted that US military resources might struggle to counter the risk to tankers even if Iran's military is substantially degraded.  Iran can strike vessels with air and sea drones, submarine or ship torpedoes, mines, missiles, and other assets.  Attacks can be conducted on an improvised scale using motorboats and first person drones like those used in Ukraine.  Furthermore, Iran has a 1,000 mile coastline on the Persian Gulf and another 500 miles on the Gulf of Oman, south of the Strait of Hormuz.  Imagine the US Navy trying to protect tankers in a stretch of coast from Martha's Vineyard in Massachusetts to Jacksonville, Florida.  That is the distance in question in the Persian Gulf alone.  Iran can attack tankers virtually anywhere in the Persian Gulf and well beyond.  To underscore the point, Iran has reportedly struck a tanker with a missile in Iraqi waters, 600 miles from the Strait of Hormuz.

The closure of the Strait of Hormuz and the resulting surge in oil prices should come as no surprise to the White House.  It is exactly the expected case scenario.

In light of rocketing oil prices, one might expect the President to declare victory and call the military home.  But here's the thing.  The Iranians may not re-open the Strait reciprocally.  The attack on Iranian leadership was so cynical, and the attack on the country so massive and brutal, that Iranians seem more likely to rally around the flag and gird themselves for desperate resistance, an "eat grass" strategy.  That is, Iranians may decide they are prepared to suffer—to eat grass, so to speak—rather than yield to the Great Satan.  In the event of a prolonged closure, Tehran may plausibly place three conditions on re-opening the Strait:

• A lifting of existing sanctions

• Reparations of, say, $150-250 bn, and

• The resignation of President Trump, Secretary Hegseth, and possibly, the entire Trump administration (some regime change payback)

Today, such demands may seem inconceivable, but events are moving fast. Secretary Hegseth’s political future already looks dicey. The longer the closure lasts, the more the Iranians will demand.

As pump prices rise above $5 / gallon in the US, the Trump administration and Congressional Republicans will face intense public pressure.  Depending on the course of events, Republicans may contest a November election without a safe seat anywhere in the country.

Of course, all this depends upon US and Israeli military capability to assure safe passage for tankers, and Tehran’s ability ability to maintain some semblance of internal order and unity, the availability of weapons after the US and Israeli onslaught, and Iranian leadership’s underlying intentions and negotiating strategies.  Be that as it may, the Strait is now closed, and prospects for re-opening remain uncertain.

The Price Cap at the start of the new Trump Administration

With the new administration taking office, it’s time to revisit the Price Cap on Russian oil exports.

The Price Cap and Embargo as currently structured have failed. They need to be modified, and in doing so, $50 bn in annual Russian oil revenues can be redirected to Ukraine, enough to fund much of the war, all of reconstruction, and repay the US and other allies at least a portion of the support provided.

Let’s take a look at where matters stand.

Oil Prices

Brent has moved in a relatively narrow range in the last half year and is trading near 10-year lows around $75 / barrel. Weakness in the Chinese economy is the most likely cause.

Urals, Russia's western crude oil export price, is holding around $70 / barrel and has been trading above the Price Cap of $60 / barrel since mid-2023, that is, for more than one and a half years.

At $68 / barrel at Friday close, the current Urals price is the third highest for the date in the last eleven years and well above the $56 / barrel the Russians received from 2015 to 2021 on average.  Thus, Russia is earning currently $12 / barrel more under sanctions than it did before the war without sanctions.

The Urals discount, the difference between the Urals and Brent oil prices, has stabilized around $6 / barrel. The current discount likely reflects greater logistics costs over longer transit routes and certain formal and informal transaction fees to facilitate the trade. As the graph below shows, the efficacy of the Price Cap lasted no more than six months, which both theory and the historical record would anticipate. A prohibition -- an enforcement-based regime -- shows initial success, but motivated buyers and sellers find alternate trading mechanisms to resume trade. Every time one route is closed, another is opened in what I have described as the Whac-a-Mole syndrome. The graph suggests that Russian oil traders achieved near total circumvention of sanctions more than one year ago.

Russian Oil Production

Russia has ceased reporting its oil production and export data, and as a result, the publicly available numbers are a mix of analysis, speculation and outright disinformation. The US EIA reports that Russian oil production has fallen to about 10.5 mbpd, compared with 11.3 mbpd on the eve of the war three years ago. Had there been no war, Russian oil production might reasonably have been expected to rise to around 12.2 mbpd.

Thus, current production estimates represent a reduction of 14% compared to the levels which Russia would have seen absent the war.  This is consistent with the 15% reduction to the counterfactual that we have seen under prohibitions.  For example, during Prohibition in the 1920s, per capita alcohol consumption in the US fell 15% compared to the level prior to the ban.  

Russian Oil Exports

Russian oil exports are even more murky than production numbers.  For example, the European IEA sees Russian crude and product exports at 7.3 mbpd for December, essentially unchanged since the start of the war.  By contrast, the 2024 Energy Institute Statistical Review of World Energy (formerly the BP Statistical Review) reported Russian exports down by more than 1 mbpd in 2023.  This is consistent with the EIA's view of Russian oil production, which sees production down 0.8 mbpd and Russian domestic consumption up marginally compared to the pre-war period.  As exports are materially the difference between production and consumption, the US EIA implies a decline of exports around 1 mpbd, consistent with the Energy Institute Statistical Review and at odds with the IEA's view that exports are essentially unaffected by the war.

Notwithstanding, the point is not to argue uncertain data, but to concede that neither Russian production nor exports have been crippled by sanctions.  This comes as no surprise, as it is entirely consistent with both black market theory and the dismal track record of other historical prohibitions across a range of contraband and countries.

The Shadow Fleet and the Failure of Sanctions

The imposition of sanctions in 2022 prevented western companies from transporting Russian oil in their tankers at prices above $60 / barrel. In response, the Russian government and its affiliates established their own ‘shadow fleet’ to avoid sanctions, recently estimated around 600 tankers. Of these, 276 have been sanctioned by various jurisdictions, with 213 sanctioned by the US alone.

The Biden administration sanctioned relatively few shadow fleet tankers until after the Democrats lost the election, at which time the number of sanctioned tankers quadrupled, from 54 to 213.

The Brent oil price shows why such sanctions, which could have been imposed years earlier, were delayed until after the election. The increase in the number of sanctioned vessels led to a short-term restriction in Russian supply and a surge in tanker rates, translating into a $10 / barrel increase in the price of oil in a matter of days.

No politician or bureaucrat in the advanced economies would wish to take credit for raising the price of gasoline at the pump. This includes President Trump, who has publicly called on Saudi Arabia to reduce oil prices and backed down when his proposed tariffs were set to increase fuel prices in the US Midwest.

This paradox is the central problem for Ukrainian decision-makers and analysts who continue to push sanctions on Russian oil production and exports. Ukraine’s allies simply do not want higher oil prices, and they would rather see Kyiv fall than push through a 50 cent increase in the price of unleaded on their constituents.

As a result, the sanctions regime — the Price Cap in particular — remains as porous as a sieve and no amount of carping from the Zelenskyy administration is going to change that.

The lamentable part of the story is that is was all predictable far, far in advance. My readers will know that I highlighted these risks six months before the Cap was even implemented. This was no accident. Politicians love prohibitions, and therefore sanctions on Russia were almost certain to be in the form of prohibitions, which would then predictably fail, as they have done.

Fixing the situation is a straight-forward matter, a topic for future post.

Rigs and Spreads April 26: Unchanged

The US oil business remains as uneventful as I have seen it since I started covering the sector 17 years ago. Very little has changed since last September, including rig and spread counts and oil production.  It’s frankly a bit strange in an industry characterized by massive swings, both up and down.  Of course, stability is preferable.  Nevertheless, the history of oil tells us that it is unlikely to last too long.

• Rig counts

• Total oil rig counts: -5 to 506

• Horizontal oil rig counts: -2 to 457

• Frac spreads: -3 to 257

• DUC inventory has largely stabilized at 16 weeks of turnover

Rigs and Spreads April 26

The Alternative is sinking Russian Tankers

It's been a wild week.  Over the weekend, Iran unleashed a barrage of missiles on Israel; the world awaits the response.  President Trump is in the dock, in a criminal trial he looks set to lose.  Speaker Johnson finally appears ready to introduce various funding bills for Ukraine, Israel and Taiwan, even as the Clown Show tries to take him down.  And meanwhile, the US Secretary of Defense, Lloyd Austin, admonished Ukraine to observe proprieties and not make waves as the country fights for its life.  The US appreciates that the situation may be desperate, but for goodness sake, please do it quietly! Those attacks on Russia refineries could increase fuel prices and inconvenience all of us.

Ukraine has been facing the twin challenges of an excessively timid Biden administration and a wildly dysfunctional Republican conference in the House.  Barring a vote to fund Ukraine this weekend -- and even with it at some point -- Ukraine may be compelled to try to restrict Russian oil exports through the Black Sea.  A combination of Russian, western and other tankers export almost $10 billion of Russian crude from the Black Sea every month.  That equals the entirety of Russia's defense budget.  The oil continues to flow only because the US and western Europe so desire.  In essence, the US is protecting Russian oil exports and allowing Russia to fund the war thereby.  

Ending this trade would materially degrade Russia's ability to conduct the war.  It would also raise oil prices comfortably to $150, and perhaps as high as $200, per barrel.  This would push Europe into a steep recession and would similarly punish US consumers.  Indeed, US drivers would lose $60 bn / month in added gasoline and diesel costs, with the price of regular gasoline reaching perhaps $6 / gallon ($8 in California).   US government support of $60 bn for Ukraine for the entire year would look like peanuts by comparison.

Should that happen, Kyiv would be in a position to shift the blame firmly onto the MAGA Republicans in Congress.  Does Marjorie Taylor Greene prefer $6 gasoline to supporting Ukraine?  Kyiv can put her to the test.  

A strike on a Russian tanker would also panic the White House, prompting a swift and desperately needed restructuring of the Price Cap.  Ukraine will not win the war without it. 

Attacking Russian tankers is, of course, a politically risky option.  A very risky option.  On the other hand, certain defeat at the hands of the Russians is a much higher price to pay.  If push comes to shove, the Ukrainians need to shove.  Marjorie Taylor Greene and the MAGA Republicans need to decide if they want to own $6 unleaded as the Ukraine vote reaches the House floor.  

Oil Prices

Brent crested $90 last week, but is trading down a bit, $87 at writing.  Nevertheless, copper prices continue to surge.  Thus, either copper has to retrace, or Brent might be expected to rise to $96 / barrel.  

Urals has closed up, much as expected, to $78 / barrel, $18 / barrel above the Price Cap.  

The Urals discount, the difference between Russia's western crude oil export price and Brent, has compressed to around $11 / barrel, again, much as expected.

Urals is now at the highest level for this date in at least nine years.

Despite US fretting, European gasoline and diesel prices do not appear materially affected by Ukraine's attacks on Russian refineries.

Overall, oil prices are developing much as expected and against Ukraine's interest.  The easiest, though high risk, way to motivate a desperately needed and vastly overdue restructuring of the Price Cap would be an attack on an oil tanker carrying Russian crude in the Black Sea. If the House fails to fund Ukraine and the White House declines to revisit the Price Cap, it might come down to that.

Not good.

Trends are running markedly against Ukraine this week.  House Speaker Mike Johnson must put Ukraine funding on the table right now, as the situation is becoming critical.  And Ukraine won't win the war without a restructuring of the Price Cap.  That's the moral of the story for this week.

Oil Prices

Oil prices really took off this week, with Brent closing above $91 / barrel on Friday.  This is the highest since September. 

One might be tempted to attribute this wholly to Russian and  OPEC+ supply production cuts, but in fact, it's not just oil.  Copper has had an even better run, closing on Friday at $4.25 / lb, the highest in fifteen months.  Copper and oil covary, and as such, copper is implying the 'fair value' of Brent should be about $93.  Therefore, oil seems to have some upside potential. Taken together, oil and copper are indicative of a strong global economy.

China is the exception.  Iron ore and steel prices are hovering near five years lows, although not at exceptionally low levels.  Such prices are heavily influenced by Chinese real estate and infrastructure construction, and both are struggling just now.  

In any event, oil prices are evolving as leading investment banks have anticipated.  I would add that US shales will not come to the rescue this time, with the EIA forecasting largely flat US oil production over the next several months.

Following on the Brent rally, Russian oil prices are also showing life, with Urals closing the week above $75.  The Urals discount, the difference between Russia's Urals oil export price and Brent, averaged nearly $16 / barrel for the week.  This is likely the result of delays in reporting, and we might expect the discount to close back to $14, with a tendency towards $12.  Urals at $80 / barrel is within sight.

Finally, the Urals price is not only well above the $60 Price Cap and rising, it is also testing nine-year highs.  This is a lousy situation for Ukraine, but entirely predictable and the direct result of poor decision-making in both Washington and Kyiv.

Finally, EU fuel prices appear largely unaffected by Ukraine's continuing attacks on Russian refineries.  Notwithstanding, expect gasoline and diesel prices to follow crude oil prices up, as is normally the case.

So, to sum up the takeaways:  While Russian and OPEC supply cuts may be lifting oil prices, they are not the only factor.  A strong global economy appears equally responsible, suggesting that oil prices could continue to rise, just as a number of analysts have been forecasting.  Urals is already $15 above the Price Cap and $4 / barrel above the budget numbers used by the Russian central bank.  The Urals discount is likely to compress further, pushing Urals closer to $80 over the next few weeks.

Meanwhile, the Ukrainians are running low on ammo and anti-aircraft missiles, just as the Russians have developed a more effective glide bomb and reports are surfacing about a 300,000 man assault by the Russians on Kharkiv.  It's now or never for Speaker Johnson on Ukraine funding; and Washington and Kyiv had better start contemplating a near-term restructuring of the Price Cap if Ukraine is to prevail.

Putin: Oil to $100 to Elect Trump

JP Morgan strategists see "Brent crude heading toward $100 a barrel this year without countermeasures to balance Russia’s decision to cut production".  As I noted last week, Russia looks to cut production by roughly 500,000 bpd, complementing OPEC cuts of similar size.  Barron's notes: 

“The shift in Russia’s strategy is surprising. At face value, and assuming no policy, supply or demand response, Russia’s actions could push Brent oil price to $90 already in April, reach mid-$90 by May and close to $100 in September, keeping pressure on the U.S. administration in the run-up to elections,” J.P. Morgan’s Natasha Kaneva said [in a note issued on Wednesday, March 27].

This is a curious, but not surprising, development.  To date, the Kremlin has not pursued oil price maximization to finance the war.  Therefore, the motivation now is likely different, and from the Kremlin's perspective, much more compelling.  As Barron's and others point out, oil price increases appear designed to encourage US voters to reject Biden and elect Trump.   This in turn reflects two implicit beliefs from Putin.  First, the choice of US leader appears of paramount importance.  That is, Putin believes Russia cannot defeat Ukraine unless the US abandons Kyiv.   While this may be news in Republican circles, I have stated on several occasions that NATO's population is six times and its GDP is a staggering twenty-fives times that of Russia.  Russia's taking on NATO would be akin to a 10 pound child taking on a 250 pound man.  I take Putin as a reasonably intelligent man, and he appreciates Russia's odds are unfavorable if NATO, and in particular, the United States stands beside Ukraine.  Electing Trump, therefore, is a key Kremlin priority.

Second, Putin appears to place supreme confidence in the actions of Trump were he re-elected.  Why?  Why would a Russian autocrat feel he can exercise absolute dominance over an elected US president?  Why does Putin believe Trump and the US will be subservient to the Kremlin's wishes?  When, in the entire history of the United States, did a US president crawl before a two-bit dictator?  

Russia has been exploiting Republican paralysis in the US Congress to attack Ukraine at a murderous pace for the last six months, but at a high cost.  According to Ukrainian official numbers, eliminated Russians now exceed 440,000, tank losses are approaching 7,000; armoured personnel carrier losses exceed 13,000; and more than 11.000 pieces of Russian artillery have been destroyed.  Can Russia sustain this pace?

If one wants to assess the Kremlin's state of mind, there is no better source than Viktor Orbán, Hungary's Prime Minister and Putin's NATO mouthpiece.  Last month, Orban suggested that Ukraine be left as a neutral buffer state between Russia and Europe.  This can be taken as a Kremlin trial balloon to seek a settlement to the war.   On March 15th, Putin added this:

"For us to hold negotiations now just because [the Ukrainians] are running out of ammunition would be ridiculous. Nevertheless, we are open to a serious discussion, and we are eager to resolve all conflicts, especially this one, by peaceful means."

In other words, Putin will discuss peace, but because the US is refusing to arm Ukraine, Putin wants better terms.  Nevertheless, Putin is signalling that the war is beginning to wear Russia down.  He is feeling for an exit, one which can only be achieved if the US abandons Kyiv.  Therefore, Putin's strategy fundamentally depends on his influence over the Republican Party, and the Republican Party today is the creature of Donald Trump.  As Putin feels confident in his ability to control Trump, re-electing Trump is central to Russian strategy.  Hence the drive for $100 oil.

Some analysts have suggested the US could once again tap its strategic petroleum reserve to counteract Russian and OPEC+ production cuts.   Is this feasible?  The SPR was drawn at the pace of 1 mbpd in the early stages of the war, about as much as would be required to offset announced OPEC+ production cuts.  As the graph below shows, such draws are not unprecedented, even in recent history.

Source: EIA

On the other hand, the SPR is depleted.  The Biden administration has drawn down the reserve to only 55% of its normal levels.  To counteract OPEC+ production cuts, we forecast the Biden administration would have to further reduce the SPR to about 200 million barrels, only ten days of US oil consumption and less than one-third of customary levels.  In principle, this is possible.  As a political matter, and more importantly, as a matter of prudent management, such draws appear problematic.  

* Forecast assumes SPR is drawn at a pace of 1 mbpd to counteract Russian and OPEC+ oil supply cuts

Source: EIA, Princeton Policy forecasts

Importantly, the US would be drawing its strategic reserves even as massive amounts of excess crude are parked in the non-OECD countries, most notably China.  As I noted earlier, excess crude inventories soared during the pandemic, largely owing to collapsed consumption.  By late 2021, however, the US and other OECD countries had largely recovered, and inventories, as measured by days of turnover, had returned to normal levels.  Not so in Asia.  China's delayed re-opening kept excess inventories elevated, and the Russia-Ukraine war started before such excess crude inventories were fully run down.  Instead, the Price Cap and Embargo offered an enormous incentive for Indian and Chinese traders to hoard oil, which they do to this day, to the tune of about 1 billion barrels above normal operating needs.   Thus, the use of the SPR to counteract the Russia and OPEC+ production cuts would have the effect of gutting US strategic reserves even as Asia, and most notably China, is awash in speculative, excess crude, in addition to their own strategic reserves.  And, of course, all this is happening in the context of a European war with serious risks of spreading to East Asia.  Raiding the SPR to win the November election looks like bad policy and may even prove to be bad politics.

Source: Princeton Policy analysis of EIA STEO data

Meanwhile the Ukrainians continue to attack Russian oil refineries, reportedly causing a 4% loss of throughput and a 25% increase in Russian fuel prices.  European Union fuel prices appear largely unaffected, although the Biden administration worries about retaliation against western energy infrastructure.  

Source: European Commission, data through March 25

The dysfunction between Washington and Kyiv regarding policy towards the Russian oil business is essentially attributable to the misspecification of the Price Cap and Embargo.  Were the Price Cap appropriately designed and implemented, Brent would effectively be capped at $75 / barrel through the US election in November.  The excess inventories in Asia are all stored at logistics hubs and can easily be sold and delivered for consumption.  The greater the OPEC+ production cuts, the faster excess crude inventories would flow into the market.  Further, any increase in the price of oil would be beneficial to Ukraine, as a properly structured Price Cap mechanism would fully capture the value of the increased price.  Brent at $100 / barrel would translate into an incremental $80 billion to Ukraine per year.

Finally, I would note the Kremlin's hostility to the US in attempting to raise oil prices to inflict damage on US consumers and tilt the US election.  I would also bring attention to Business Insider's investigative piece on Havana Syndrome, which increasingly looks like attacks by Russian security services on US government employees and officials during peacetime.  For those who think Russia is America's friend, I encourage you to read the article.

******

Oil Prices

Brent continues to show strength, closing on Monday at $87.75.  Urals, Russian western crude oil export price, remains at $72, albeit with a lag in reporting due to the Easter holidays.  Expect Urals to rise by $2 / barrel in the next few days.  

If Brent crests and holds above $90, the Urals discount should shrink closer to $12 / barrel from the $14-15 discount seen in the last several weeks.

​The Urals oil price remains the highest in the last nine years bar 2022.

Bottom line: Both Kyiv and the White House need to re-open the issue of the Price Cap and restructure it to Ukraine's and the Biden administration's advantage.