View / Trump’s race against time — and oil prices, and inflation

US President Donald Trump will probably never admit this, but when it comes to the war with Iran, he is in a race against time, before the conflict starts eroding the pillars of his economic agenda.

Since the start of joint US-Israeli attacks on the Islamic Republic over the weekend, Trump has given multiple — and sometimes contradictory — statements about his objectives and timeline. But when it came to the economy, one comment that stood out was his insistence that he wasn’t worried about oil prices or supply disruptions in the Strait of Hormuz, the world’s most important energy chokepoint.

Whether it was wishful thinking or an attempt to project confidence, the remarks didn’t survive the market: Oil has rallied more than 15% and tankers are avoiding the Strait.

That’s the context for his announcement that the US will offer insurance “at a very reasonable price” to encourage tankers to resume crossing through the waterway. He also pledged to provide vessels with US naval escorts “if necessary.”

Maintaining the flow of energy supplies is critical if Trump wants to avoid higher inflation and higher-for-longer interest rates before US midterm elections this autumn. JPMorgan has warned that a sustained disruption of crude exports via the narrow waterway could push prices to $120 a barrel. Bloomberg Economics’ nightmare scenario was $108. Such fears have already prompted traders to pare bets for interest-rate cuts by the Federal Reserve this year. Even US Treasury bonds, a haven asset, sold off, a sign inflation fears aren’t theoretical.

Those market dynamics could then boomerang back onto the war itself: A higher inflation rate and, consequently, the Federal Reserve pausing a campaign of interest rate cuts — or even going in the opposite direction and tightening borrowing costs — could prompt a “revision to the US war strategy,″⁣ Ziad Daoud, chief emerging markets economist at Bloomberg Economics, said during a recent webinar.

Conversely, if Trump’s insurance plan is successful, it could buy him time to finish the war on his own terms. On this front, there is a precedent in the region that offers some reassurance: the “tanker war” during the latter stages of the Iraq-Iran war. By late 1986, Iranian attacks on ships in the Gulf triggered a US decision to start reflagging and escorting vessels. The threat didn’t disappear, but oil continued to flow.

This time, the window for action is tighter and the risks are higher.

With oil storage sites filling quickly, exporters are coming under pressure to curb output. Iraq, OPEC’s second-largest producer, has already begun shutting its largest field. Kuwait has less than two weeks’ worth of storage before it has to halt exports if the Strait of Hormuz stays shut, according to JPMorgan.

Even though the Iranian regime — or what’s left of it — is fighting for its survival, it has so far avoided large-scale attacks on Gulf energy infrastructure (though it has targeted Saudi Arabia’s biggest oil refinery, and the world’s biggest LNG facility, in Qatar). One possible explanation is that such a shift would surely invite retaliation in-kind, depriving Tehran of its most crucial source of revenue at a time when its economy is on its knees.

Since day two of the conflict, which saw the killing of Iran’s Supreme Leader Ali Khamenei, my base case has been that Trump would soon take his wins and look for an off-ramp to end the most intense phase of the operation. Now, it seems he is trying to buy more time. He needs the oil market to cooperate.

Alaa Shahine Salha is a senior executive at Saudi Research & Media Group and an economics contributor for Asharq Business with Bloomberg. He previously served as Bloomberg News managing editor for the Middle East and managing editor for economics in Europe.