Tim’s view
US President Donald Trump’s brinksmanship with Iran will test how much pressure the global oil market can withstand before American consumers start to pay the price.
Oil prices jumped to their highest point in nearly a month on Wednesday, after the White House press secretary warned Tehran would be “very wise” to make a deal on its nuclear program and the Iranian military conducted live-fire drills in the Strait of Hormuz, through which nearly 20% of the world’s oil passes.
It’s become a working assumption in the Trump administration that military activity or geopolitical tensions in oil-producing regions no longer carry much risk of market blowback; US Energy Secretary Chris Wright said as much to Bloomberg’s Javier Blas this week. There’s plenty of evidence from the past year to support that theory, from the ouster of Nicolás Maduro in Venezuela, to attacks on Russian shadow fleet vessels by Ukrainian special forces, to the brief Israel-Iran conflict last summer, all of which produced a collective shrug from oil traders.
Some analysts took to calling this the “Houthi paradox” after Yemeni militias attacked tankers in the Red Sea. The idea is that mild global oil demand plus record-high US production have created conditions in which each successive disruption — events which in past years would have reliably jolted prices up — only reinforces leaders’ conviction that oil price volatility is no longer a side effect they need to worry about.
That rule is hardly written in stone, however, and could be overturned. Iran’s leaders have repeatedly threatened to intervene more forcefully to choke off oil supplies; regime change there could have a similar outcome, if the resulting internal turmoil disrupts production. It’s also not clear how long drillers in the US shale patch will be willing or able to keep pumping as much as they are with prices that are still close to their lowest since the pandemic. To the extent that energy affordability is a critical issue for Trump ahead of this year’s midterm elections, the administration seems to be betting the Houthi paradox will hold up. The next few weeks will show if that confidence is well-founded.
Notable
- The US ramped up pressure on Iran, sending its largest concentration of air power to the Middle East since 2003. Two aircraft carriers and dozens of land-based planes have moved to the Gulf, enough to wage “a sustained, weekslong air war against Iran,” The Wall Street Journal reported.