Jeremy Warner
Will anyone still be talking about Iran in a year’s time?
For the moment, the Gulf war continues to dominate the headlines. Scarcely a day passes without some new warning of economic apocalypse to come.
With the Strait of Hormuz still closed to shipping – though Donald Trump suggests that may not be the case for much longer – the world economy is running on empty, it is widely said. Without an immediate resumption in supply, it will soon grind to a halt, we are told. But here’s the point: people have been saying this for weeks now and it hasn’t happened yet.
Just you wait, say the doomsters. We are running out of oil, gas, jet fuel, fertilisers and much else besides. This reality will hit the global economy like a 10-tonne truck any day now. Sky-high prices and rationing will be just the half of it.
There is, however, another equally plausible scenario, and it’s the one that markets seem increasingly inclined to believe. This is that Trump desperately wants out and is even prepared to eat some humble pie in attempting to secure such a withdrawal.
Of course, not in a month of Sundays would you find the US president admitting as much. In private, he perhaps accepts what JD Vance, the vice-president, has privately said all along – that the war was a strategic blunder.
However, he’s never going to say so in public. Whatever is finally agreed will be presented as a victory. The trick is to find the right form of words – “constructive ambiguity”, to use the jargon: a sufficiently vague set of commitments that allows both sides to claim that they’ve achieved what they wanted.
The reality – that this was a major error by the United States – doesn’t really matter from Trump’s point of view as long as gasoline prices quickly return to normal and the US economy resumes its strong upwards path. Both these objectives are under serious threat as long as the Strait of Hormuz remains closed.
At the time of writing, we were again said to be close to a deal that would extend the ceasefire for a further 60 days, lift the blockade of the strait and allow for resumption of shipping. In the past month or two, we’ve heard many such claims, only for hopes of a deal to be dashed anew. So it might be unwise to bet on the latest outburst of optimism.
With Trump, it’s always impossible to tell. There’s many a slip …
In any case, Trump’s White House still has some cards to play. As a major producer of oil and gas, the US is as much a beneficiary of scarcity and high prices as a victim of them. Fossil fuel exports are booming as never before.
What’s more, investment in US fracking is once again surging with the return of elevated oil prices. Therefore, achieving a lasting settlement does not have the same degree of urgency for the US as it does for Asia and Europe.
Prices at the pumps nevertheless speak a good deal louder politically than any bonanza in oil industry profits and exports. The rising price of gasoline is already having a markedly chilling effect on US consumer confidence.
It is worth noting that most US recessions are preceded by a sharp spike in oil prices. Higher gasoline prices are in turn likely to trigger tighter monetary policy, threatening to tip the entire economy into recession and spark a sharp sell-off in stock markets.
The negative effects on household wealth of any such share price crash might further eat into consumer spending, causing a downward spiral in economic activity.
For now, US growth is highly dependent on the boom in artificial intelligence capital spending. This shows few signs of slowing but significantly higher interest rates would certainly give hyperscalers a lot to think about. Any combination of falling AI and consumer spending would be a pretty toxic mix.
With Congressional midterm elections looming, Trump needs a swift resolution almost as much as everyone else. That’s why stock markets remain elevated and the oil price isn’t a great deal higher still. Investors think that a settlement is imminent.
But markets are frequently wrong, particularly when it comes to geopolitics, where the abiding presumption of rational, self-interested outcomes often proves to be delusional.
I’ve cited the following example before but it is always worth repeating.
In the lead-up to World War I, stock markets sailed blissfully on: not because investors were unaware of the ever-louder drum beat of impending conflict but because they collectively assumed none of the great powers would be stupid enough to stumble into the catastrophe of an all-out war.
That view was perfectly encapsulated in a highly influential book by Norman Angell, a British journalist, published a few years before the outbreak of hostilities. Angell’s The Great Illusion argued that the economic costs of war and the accompanying disruptions to trade were likely to be so devastating that nobody could possibly hope to gain by starting one.
Economic interdependence between industrial countries would be “the real guarantor of the good behaviour of one state to another”, Angell argued. This had never stopped countries from going to war before but it was also true that the level of economic integration and interchange between elites in Europe at the time was without precedent.
Sadly, it didn’t help. Yet markets refused to believe in bad outcomes right up to the point where troops were mobilised and borders closed.
It is obviously possible that they are making the same mistake over the Gulf and that Trump doesn’t care whether he tips the entire world economy into recession. But I imagine he does and he would certainly care a lot if the verdict of stock markets was to crash.
Markets therefore assume he’ll settle, even if it means some loss of face and formally recognising what was always obvious – that thanks to its geography, Iran has a chokehold over energy supplies from the Middle East.
If you don’t believe the judgment of investors, betting markets are equally categoric. Polymarket puts the probability of an extended ceasefire by June 7 at 60 per cent and an overwhelming 78 per cent by the end of June.
Trump has a notoriously short attention span and he will by now be getting very fed up with a conflict he originally expected to be over within weeks. Iran’s economic interest in reopening the Strait is no less urgent. If the regime is to survive, it desperately needs to start exporting oil again. In this respect, Iranian and US economic interests are perfectly aligned.
Given his refusal to put American lives on the line, Trump will have to settle for the comparatively limited achievement of substantially degrading Iran’s war machine.
This is a complacent view, admittedly, but one justified by the facts. My guess is that Trump will soon move on to other things and by this time next year, today’s global energy panic will be seen as just another passing squall.
