With just 44 days left until the USA’s midterm elections, the Islamic Republic of Iran has proved once again to be strategically superior to the world’s greatest superpower. Diesel currently costs an average of $6.48 per gallon in the USA, a record high. Just a week ago it was $6.16, and price increases show no sign of slowing – if anything, the opposite is true. For a country disproportionately dependent on that fuel and an electorate already disgruntled by stubborn inflation and income inequality, this is likely to be the final political straw and the end of Trump’s control over all three branches of government.
Iran is not responsible for this entire situation, but it is a sine qua non. Between 10 and 14 September, Iranian proxies in southern Iraq hit the vital east-west pipeline running through Saudi Arabia. At exactly the same time, Iran-backed Houthis surged up the Red Sea coast to further cement their control over the Bab al-Mandab Strait. As a result, between four million and six million barrels of oil per day are no longer flowing via that route. The timing is neither coincidental nor arbitrary: Iran has been planning this for months.
We can be sure of this for a number of reasons.
Firstly, Iran has been capable of hitting that pipeline for the entire duration of the war. Its leaders have chosen, very deliberately, not to do so. Arguments that they feared to stir the wrath of the “mighty” Saudi air force are silly. Said air force is notoriously feckless and ineffective, and any Gulf state that attacked Iran would invite destruction of its own oil and gas infrastructure that would be very difficult to replace in anything under five years.
And second, Iran is clearly intent on humiliating the Trump administration. On 1 September Scott Bessent, the USA’s clownish Secretary of the Treasury, bragged to Fox News that “...in two years, the Strait of Hormuz will be like a worthless piece of water”. Given that the east-west pipeline carries the last reliable flow of crude oil out of the Gulf, it’s difficult to see how this timing is not connected.
Do the mullahs of Iran really watch Fox News? Yes, of course they do. The clerics and military hardliners who run that beleaguered country are keen students of American politics. They know considerably more about the mood of the US electorate than Donald Trump does. The president, long bored with the war, is cosseted in an impregnable information bubble and fed exclusively positive news by his closest aide, Natalie Harp.
Which brings us to the third reason: Iran understands the power of an “October Surprise”, an event or revelation of new information that casts a candidate or party in a negative light just before an election. Yes, I’m aware that it’s still currently September. Hitting the pipeline now has lit a long fuse that will trigger an unprecedented spike in diesel and petrol prices in early to mid October. Which means that US voters will be incandescent with rage just before they go to the polls.
A fourth reason for the timing of the sabotage of the pipeline is that, after running above 96% capacity for nearly the entire year, the USA’s oil refineries are now beginning to break down. Those breakdowns are the proximate cause of the most recent fuel price spikes, and will remain a problem throughout the northern winter. Even as they come back online, they will face higher crude prices.
Fifthly, Iran calculated – correctly, it turns out – that Saudi Arabia would choose to supply its Asian customers at the expense of its European ones. Throughout the summer, Europe has been sustained by a lifeline of both crude oil and refined products (particularly jet fuel) flowing from the USA. That demand will now intensify just when the US is itself experiencing short supply. This will further accelerate price increases, and sustain them at higher levels.
The sixth reason is perhaps the most consequential. Trump has clearly decided that the best course of action is to pretend the war isn’t happening and downplay it when asked directly about the subject. Iran is, very intentionally, making that position impossible to sustain even for just six more weeks. When the price of diesel climbs high enough, the political heat on the Trump administration will rise to levels even they cannot ignore.
You might also list the Ukraine War among the reasons for the Iranians’ timing. The Ukrainian army has been targeting Russia’s oil and gas infrastructure, wreaking havoc on Russia’s ability to produce refined oil products. As a result Russia, which usually supplies around 10% of global diesel exports, has halted all exports. This has been going on for months, so the timing doesn’t line up as neatly, but I am sure the mullahs are privately cheering Ukraine on.
What can America do to avert or mitigate this crisis? The US navy is allegedly sneaking millions of barrels of oil through the Strait of Hormuz on a daily basis. This is likely to be at least partially true, but the average rate of flow is nowhere near the level required to avert the oncoming catastrophe. If you believe the Trump administration’s claims that hundreds of millions of barrels are transiting the strait each week, then I have a secondhand bridge to sell you.
All of the other levers that Trump might pull are either inconsequential or impracticable. He can draw the remaining 38 million barrels of oil out of the Strategic Petroleum Reserve (SPR), but it’s unclear whether this is even mechanically possible. The SPR is at such a critically low level that the natural pressure it relies on to operate has begun to fail.
Trump could also unilaterally halt all exports of both crude and refined products, but the knock-on effects of that are likely to far outweigh any benefits. Because of its sheer scale, both in landmass and population, the USA both imports and exports millions of barrels of oil and refined products every day. Turning off one (outgoing) tap will make it far more likely that other (incoming) taps are turned off as a result. The entire US West Coast could be effectively stranded.
There are some who still believe that more military force will do the trick. Just a few more thousands of tons of bombs. Just a few more thousand young people to feed into the meat grinder that any ground invasion would become. I loathe the current Iranian regime – it is unambiguously brutal and evil – but pushing deeper into this quagmire will achieve nothing except stalemate and prolonged misery for the beleaguered populations of the Gulf countries.
The single most effective thing Trump could do – literally today – would be to capitulate wholesale to Iran and concede control over the Strait of Hormuz. Within days, oil and refined products would be flowing through the waterway at an ever-increasing rate.There is talk of a possible negotiated settlement. Mohsen Rezaei, Iran’s security chief, announced an updated set of demands on TV over the past weekend.
I’m convinced Trump will not do the one thing that would solve the problem. The black hole at the core of his personality depends on a constant stream of affirmation and flattery. To accept defeat and be seen as “weak” is something he fears far more than mere death. Just look at the manic energy he expends in “proving” that he won the 2020 election. He will happily plunge the entire planet into an economic depression before admitting that he has lost. Online betting markets tend to agree with me. The current odds of peace talks starting by 30 September are 13%.
I have been wrong several times about exactly how the Iran War would play out, but while I have been incorrect with regard to the finer details, I have always been directionally correct. I have also been one of many people predicting the crisis in oil that we are now entering. In that case, like a lot of analysts more informed than me, I was wrong only about the timing.
Unfortunately all of us Chicken Littles have only made the problem worse. Most people now roll their eyes when they hear our portents of doom. It’s no use being right about nine out of the last three recessions. On a long enough timeline all economies eventually shrink, and any crisis that can happen, will happen.
What’s clear is that the world is, finally, in a full-blown oil crisis. Even worse, this crisis is in physical supply, not merely market prices. With all of the world’s major reserves (outside of China) depleted, we no longer have a cushion. The slightest wobble in the supply chain is now leading to physical shortages of petrol, diesel and jet fuel. Even if the strait were totally open as of right now, it’s too late to avoid the pain completely. We can only shorten its duration. This problem is likely to get worse before it gets better. Buckle up, everyone.