The war initiated by the United States and Israel against Iran has unleashed a level of volatility in global energy markets that analysts say shows no signs of abating, with even the most sober observers now warning that the price of a barrel of oil could soar past $200 if the conflict continues to disrupt shipping through the Strait of Hormuz.
The numbers tell a story of a market unmoored. Benchmark Brent crude, which traded below $60 per barrel earlier this year, jumped to $80 last Thursday. It then bounced to $120 in thin weekend markets before settling around $92. The range of the recent oil price has been 50 percent of where it stood a mere five days ago. This is not normal behavior for what remains the modern world’s most important industrial commodity.
A similar but slower move from $70 to $120 per barrel was seen in late 2021 and early 2022 around the Russian invasion of Ukraine. But as investment bank Goldman Sachs has noted, the physical disruption of oil supply due to the war in the Persian Gulf is 15 times as severe as that of the Ukraine crisis.
One respected and usually non-alarmist oil commentator has suggested the price could jump to over $200 per barrel if the situation in the strait is not resolved.
The International Energy Agency announced this morning that member countries would release 400 million barrels of oil from storage, starting with Japan. But the impact of the announcement has been muted. A release that amounts to four days of global consumption and roughly 20 days of oil and products transiting through the Strait of Hormuz has done little to calm a market grappling not just with multiple uncertainties but also wildly inconsistent official messaging.
The fundamental diplomatic uncertainty cuts to the heart of the matter. It remains unclear what U.S. and Israeli aims are in this war. At various moments, the White House has called for Iran’s unconditional surrender, then modified this to reflect that the administration will determine what constitutes such an outcome, whether they themselves say it or not.
Yet other officials have called for the equivalent of a Morgenthau Plan that leads to the comprehensive deindustrialization of Iran. And even if President Trump decides he has had enough and wishes to end the war, it is far from clear that Iran would agree to what might seem a premature ceasefire from its own point of view, where it was still left substantially weaker against future attacks and had not imposed enough costs to restore deterrence.
Against this backdrop, the oil market struggles to judge both U.S. and Israeli intentions and the potential scale of Iranian retaliation against all the oil infrastructure in the Persian Gulf, a region that accounts for about 20 percent of all global production of crude petroleum and products.
“Get ready for oil to be $200 a barrel, because the oil price depends on regional security, which you have destabilized,” said Ebrahim Zolfaqari, a spokesperson for Iran’s Islamic Revolutionary Guard Corps, who warned the world to expect oil prices to surge as the Strait of Hormuz stays closed amid military operation in the region.
The diplomatic uncertainty has been compounded by two basic questions that reflect the military uncertainties: What can Iran do to harm shipping, and can the U.S. Navy escort ships safely through the straits?
As to the first, three vessels were reportedly struck yesterday in the Strait, indicating that Iran is ready and able to use force to stop ships.
The answer to the second question is more ambiguous. Yesterday, the U.S. appended a farcical element to the tragedies unfolding in the Gulf, as Energy Secretary Chris Wright first posted, then deleted, a tweet saying the Navy had successfully escorted a tanker through Hormuz.
The White House later confirmed that no such escort had taken place, with a spokesperson saying the post was incorrectly captioned by department staff. Greater clarity from the U.S. on this question does not appear to be forthcoming.
The broader point is that Iran’s offensive capabilities against civilian shipping have been described as cheap and plentiful, a reflection of the revolution in drone warfare. It is perhaps this capacity that has led the Navy to tell the shipping industry that it is simply not possible to escort ships right now.
The scale of the war and the fact that the U.S. is a primary and declared belligerent in the conflict also undermines financial tools like the reinsurance coverage that has been proposed by the Development Finance Corporation. This makes for a different situation than the convoy and insurance combination provided by the U.S. to Gulf shipping during the Iran-Iraq war in the 1980s.
Iran knows very well that the price of gasoline remains a key factor in U.S. domestic politics. This fact suggests that Hormuz and the global oil markets will remain a key point of pressure in this war. And solutions to the diplomatic, military and financial uncertainties described above still seem very far away.