The oil market’s worst nightmare just came true.
For decades, energy traders have feared that a war might one day close the Strait of Hormuz — the narrow waterway that links the Persian Gulf’s oil reserves to global markets. Before today’s war in Iran, about one-third of the world’s seaborne oil exports and a fifth of global natural gas shipments flow through the strait each day.
Iran has long had the power to block that artery. And it threatened to do so, repeatedly. But it could not follow through on that threat without gravely damaging its own economy. Thus, investors always viewed that scenario as a “tail risk” — a grim but wildly improbable hypothetical.
As a result, oil prices have soared and Gulf state producers have throttled production, as they have no way to get all their crude to market – and no place to put their unsold stocks.
The scale of today’s crisis is unprecedented. And its trajectory is hard to discern. Investors appear profoundly uncertain about where we’re heading: During the past week, oil prices have repeatedly risen or fallen by more than 20 percent in a single day.
If anyone knows what the Iran war will mean for the global economy, however, it might be Gregory Brew.
Brew is a historian of both the Iranian regime and world oil markets. As a senior analyst at the Eurasia Group, he has spent years advising investors on the risks posed by the conflict between Iran, the US, and Israel.
We spoke on Tuesday about how today’s oil shock will impact the economy, the obstacles to a quick ceasefire — and why it may already be too late to avoid a prolonged energy crisis. Our conversation has been edited for clarity and concision.
How big is today’s oil shock, in historical context? Does this resemble any past crisis or is it unprecedented?
In terms of barrels taken off the market, this is the largest supply shock in history by at least a factor of two. The only one that comes close is the 1979 shock, which also involved Iran, and which caused oil prices to more than double. But the current disruption — 20 million barrels a day unable to flow for over a week — is twice that size in real terms.
So, we’re very much in an unprecedented situation. Which is part of why markets have struggled to interpret it. For years, Iran has threatened to close the Strait of Hormuz and it never happened. On some level, I think traders came to believe that Iran would never really do it. Now, many believe that it’s a situation that won’t last much longer despite the fact that we’re in the second week and it doesn’t show any signs of ending.
The immediate consequences of an oil shock are obvious: higher gasoline and energy prices. But what are the downstream effects of a historic drop in the global fossil fuel supply? What are the biggest second-order impacts?
The increase in domestic gasoline prices is the most immediate and politically salient effect, but it’s not really the most important one. I would say the most important effect is higher prices for middle distillates — particularly diesel. Higher diesel prices make construction and industrial activity more expensive, not only in the United States but worldwide. That broadly depresses economic activity.
We’ve also seen tremendous increases in jet fuel prices. That’s going to show up in higher airfare costs.
But this is not just an oil crisis. It’s also a gas crisis. Twenty percent of the global LNG [liquefied natural gas] supply can’t get to market — Qatar can’t move LNG through the Strait. Europe was exiting the winter months with relatively low gas inventories, so it’s now facing higher natural gas prices that will put greater pressure on industrial output and economic activity this year. East Asia is also very exposed, particularly South Korea and Taiwan. And the Persian Gulf is a major producer and exporter of agricultural inputs, particularly fertilizer, which is going to impact food costs — maybe not so much in the United States, but very likely in South Asia.
Even at only 10 days old, this already has the makings of a macroeconomic shock that’s going to play out not only in oil but across a variety of commodity markets.
Will the United States dodge the worst of these consequences? Some have argued that America is unusually well-positioned to weather the crisis it created. After all, we’re the world’s biggest oil producer. So, we aren’t as vulnerable to energy shortages. And even as skyrocketing energy prices hurt our consumers, it helps one of our major industries — and ordinary Americans who work in it.
The US is better positioned to weather this than most countries, given that it’s a major hydrocarbons producer and exporter.
And we also aren’t that dependent on Persian Gulf oil. America consumes about 20 million barrels of oil a day. Only about 500,000 of those come from the Persian Gulf. And with natural gas, we’re basically self-sufficient.
Higher energy prices will boost economic growth in parts of the country that depend on the oil and gas industries — Texas, the Dakotas, parts of Pennsylvania. But there are big chunks of the country that depend on lower energy prices: the West Coast, the Northeast, the South, Florida. And in areas that have seen stronger growth on the back of the AI and data center boom, high energy costs end up being headwinds. I don’t think the US emerges as a winner from this, but I’m not sure it’s a big loser either.
Earlier, you suggested that this crisis could drag on longer than traders realize. Yet the White House has suggested that the shock will end imminently, even if the war doesn’t: The US Navy will simply start escorting oil tankers through the Strait, allowing crude to flow freely across the world’s seas. Is that not plausible?
I think after another week of buildup in the region, there will be a sufficient naval presence — the US, France, and others — to support at least some traffic resuming. But it’s going to be difficult to get all of the tanker and container shipping companies to accept that the security picture has improved. Some will likely sit on the sidelines for a while to see if their more courageous counterparts make it through.
“From the regime’s point of view, so long as the Islamic Republic remains standing and defiant by the end of this conflict, they will have secured a victory.”
But there is sufficient capability to guard tankers against Iranian drone attacks, which is really the most relevant threat at this point. The Iranians are likely running low on ballistic missiles and need to conserve them. Their navy has been largely sunk. They have small boats that could theoretically harass tankers, but those are highly vulnerable to counter-fire. So it’s really drones we’re talking about. Iran has a huge stockpile — thousands of them — and the capability to launch them at the Strait. The US Navy now has quite a lot of experience shooting down Iranian drones after months of combat in the Red Sea. With enough warships and aircraft, they will have the means of shooting down most of them.
But most is not all. If a few drones get through — and hit one or two tankers — traffic will be disrupted again. So if the conflict continues, we’re likely to move from a scenario where the Strait is closed to one where it is open but disrupted — where traffic is resuming, but not at pre-war volumes.
So, the White House probably can’t fully reopen the Strait through mere naval deployments. Can it do so by declaring a ceasefire? According to some analysts, the Iranian regime is not interested in a quick peace. Rather, it wants to first impose grave economic costs on the US and Israel, so as to establish a more lasting deterrent against future assassinations of its leadership. What do you make of that argument?
Iran entered this conflict with two underlying assumptions. The first was that their deterrence had been weakened and needed to be bolstered. That meant a more aggressive, escalatory response: striking not just at US troops and Israel, but also the Gulf states. Iran intended to send a very strong message: If it comes under attack at any point in the future, it will trigger a regional war with implications not only for Iran but for the security of every state in the region and for the global economy. Iran will not fall back on calibrated retaliation. If it is attacked, it will expand the scope of conflict in a way that imposes costs on everyone.
The second assumption is that they are more capable of absorbing cost and pain than the United States — specifically, that the cost of the conflict for Iran will be manageable, whereas for the US president, the price of energy and the political impact of a prolonged conflict will make it impossible to sustain. They assume they can outlast Trump. They believe they can continue firing retaliatory missile and drone attacks against US bases and Gulf states, that they can continue the pressure on energy, and that eventually Trump — not them — will be forced to deescalate. That’s what they’re waiting for.
The final point is that for them, survival and victory are one and the same. It doesn’t matter how many bombs are dropped or how much damage US and Israeli bombers do to Iran — and they’re doing a tremendous amount of damage. From the regime’s point of view, so long as the Islamic Republic remains standing and defiant by the end of this conflict, they will have secured a victory.
If Trump doesn’t blink soon, what scenario are you most worried about? Like, what sequence of events do you consider both reasonably likely and economically punishing, in the event of a prolonged conflict?
In the downside scenario, Iran is attempting more aggressively to disrupt traffic through the Strait. You have oil and goods flowing but under constant Iranian fire — frequent disruptions, frequent pauses, continued high prices, risk premia attached to every shipment in and out of the Gulf. A conflict that lasts months and keeps prices elevated for a prolonged period starts to have macro implications. It raises the prices of goods across the board, shows up in consumer price index prints, and puts pressure not just on the US and developed economies but on emerging markets that depend on energy and goods flowing out of the Gulf.
There’s an even worse scenario, though, where Iran manages to do significant damage to Gulf energy infrastructure. Right now they’re taking pot shots — an attack on a Saudi refinery, strikes on Qatari LNG facilities, a hit on a refinery in the UAE. These are largely signaling moves to indicate capability. But should the conflict continue for more than a few weeks, the Iranians will be under greater pressure to force the US to back down, and that might push them to escalate: Rather than pot shots against refineries, mass drone swarms on Saudi and Emirati oil fields that affect not just traffic through the Strait but the ability of these states to produce oil in the first place.
Let’s say the US and Iran reach a ceasefire tomorrow. Is the damage to the global oil market immediately reversible? Or have we already bought ourselves a prolonged period of higher energy prices?
In other words, will it take a long time for Gulf countries that have shuttered production — because they have no place to store their unsold oil — to fully restart their operations? Or will shipping insurance companies charge higher prices in perpetuity, now that they know that the Strait of Hormuz really can be closed?
“Actions by the US are adding risk and volatility to the global oil market.”
The shut-ins are extremely important. They’re what transform this from a supply-chain disruption into a supply shock. Before the shut-ins, this was tankers not being able to get to their destinations. But as soon as Gulf states began shutting down production, you’re not only removing barrels from the market now — you’re removing barrels from the market over the next three to six months. It takes time to reverse shut-ins and bring production back online. Even if the crisis were to end tomorrow, it would take a number of weeks for regional producers to restore output to pre-war levels.
That means the crisis will keep prices higher for longer. The narrative coming into this year — a well-supplied oil market, maybe even a supply glut — that narrative is over. The new reality is a market that is likely to be tighter, characterized by higher prices for a prolonged period, potentially stretching into 2027.
People keep reaching for historical analogies to comprehend the present crisis — particularly 1973 and 1979. How useful are those comparisons? You already mentioned that this is the largest oil shock in history. But is the global economy better positioned to weather such a shock in 2026 than it was in the 1970s — due to the shale revolution, or strategic petroleum reserves, or other factors?
For me, this brings to mind two thoughts. The first is that we are in a paradoxical environment. The 2022 energy crisis — triggered by Russia’s invasion of Ukraine — actually made market actors confident in the resilience of global energy systems. That shock was presumed to be very bad and ended up being tough but quite manageable. Most economies emerged from it in decent shape.
One was the United States. And coming into 2026, this administration believed there was enough slack in the global energy economy for aggressive action that would not trigger a major shock. Over the last six months, you’ve seen the US undertake actions that in the past would have been regarded as too risky for oil prices: supporting Ukrainian attacks on Russian oil export infrastructure, sanctioning major Russian oil companies, imposing an oil blockade on Venezuela, seizing Maduro — all leading up to the decision to engage in a large-scale military conflict with Iran, apparently under the presumption that it would not negatively affect the global energy market.
And that leads me to conclude that in the current environment — very different from the 1970s or prior crises — the key disruptive force driving volatility and risk in the international oil market is not OPEC. It’s not a rogue actor like Russia. It’s not even Iran. It’s the United States. Actions by the US are adding risk and volatility to the global oil market, in part because this administration wants to take aggressive action and thought it could do so without suffering negative economic consequences.