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.