Is a real oil crisis imminent?
Oil prices have risen sharply, yet the S&P 500 has not declined significantly so far. Outside the United States, equity markets have seen somewhat larger declines, though there is certainly no sign of panic. This suggests that markets are assuming current price levels will not persist for long. In other words, they expect the Strait of Hormuz to be largely reopened in the near future.
Several scenarios are being discussed as to how this could unfold:
- Donald Trump has repeatedly indicated that if Iran does not reopen the strait promptly, he would consider bombing Iranian infrastructure to such an extent that it would effectively set the country back to a “stone age” level. It is possible that the Iranian regime could yield under such pressure and reopen the passage.
At the same time, Trump has also stated that he may withdraw from the conflict regardless of developments in the Strait of Hormuz. Should this occur, it could provide Iran with sufficient incentive to reopen the strait, as it is not in Iran’s interest to provoke a unified global response.
- The situation increasingly resembles a stalemate. While the United States and Israel have significantly weakened Iran militarily, Iran’s closure of the Strait of Hormuz gives it a powerful economic lever. If the strait remains closed for an extended period, physical shortages of oil, gas, fertilizers, helium, and other commodities could emerge, driving prices sharply higher. Many economists believe this could trigger a global economic crisis.
Although Trump could threaten total destruction of Iran—an action that would be in clear violation of international law—such a move would likely also precipitate a global economic crisis, as Iran would retaliate aggressively. Iran has long been preparing for such a scenario and retains sufficient capabilities to sustain a prolonged conflict.
Consequently, this strategy presents significant downsides for both sides. For Trump, the risks are even greater, given the potential damage to the United States’ international standing and his personal political position. It would almost certainly result in substantial losses for the Republican Party in the November elections.
- A potential compromise scenario is also being considered. Washington may accept a suboptimal but pragmatic solution: Iran would allow passage through the Strait of Hormuz for vessels not affiliated with the US or Israel, provided a toll is paid. Figures mentioned range from $2 million per vessel to $1 per barrel. In either case, these costs are relatively modest compared to recent price volatility and would be far less damaging than a global economic crisis.
At first glance, this may appear to be the most viable short-term solution. However, it would effectively open a “Pandora’s box.” The Strait of Hormuz is an international waterway and does not belong to any single nation. Imposing tolls would implicitly grant Iran control, enabling it to close the strait again or raise fees at will—setting a highly dangerous precedent.
- Finally, there is the possibility that the United States will take a more hands-off approach. Trump has indicated that the Strait of Hormuz is of limited strategic importance to the US and that other nations should take responsibility for reopening it. Indeed, several countries appear to be moving in this direction, with a general consensus emerging around a phased approach: negotiations, followed by sanctions, and only then potential military intervention.
However, if military action ultimately becomes necessary, it could take months—if not quarters—before it is implemented. Should Iran keep the strait closed during that time, significantly higher oil prices and a global economic crisis would likely materialize well before any resolution is achieved.
Financial markets are currently pricing in the assumption that Iran has been sufficiently weakened and will, sooner or later, be compelled by the international community to reopen the Strait of Hormuz. As a result, markets are not overly concerned about the current rise in commodity prices linked to the disruption.
Our conclusion, however, is that the situation is highly complex. While a resolution will eventually be reached, it may take longer than markets anticipate. No one can predict how long the strait will remain closed. While a swift resolution is possible, we take a more cautious view than financial markets. This situation could persist for some time—long enough to pose a serious risk to the global economy—and this risk should be carefully taken into account.
Our latest Global Financial Markets Report provides further detail on these developments.
