Almost five months after Iran’s war began, the conflict has entered a “second round” as bombs fly across the Middle East after a temporary ceasefire collapsed. Iran threatens again Passage through the now infamous Strait of Hormuz, while the US has reimposed a naval blockade on Iranian oil exports.
As the world’s emergency oil stocks dwindle dangerously and prices rise again, the Trump administration appears to have lost the upper hand and faces a difficult decision: whether to escalate the conflict in an ongoing quagmire like Ukraine, or capitulate and let Iran take control of the world’s leading energy artery – with the possibility of charging service fees for transit and recouping the costs, a toll in all but name – energy and geopolitical analysts said Assets.
The decision could affect energy and fuel prices it’s going into autumnincluding the midterm elections, and set a precedent for how far the U.S. will go to defend global shipping lanes.
“I don’t think there is a military option for reopening the Strait of Hormuz,” said Gregory Brew, senior Iran and energy analyst at Eurasia Group. “The Iranians have significant influence here. I don’t think they will back down and, frankly, time is probably on their side.”
Despite being militarily battered and much of its leadership killed early in the war, the Iranian regime remains steadfast and determined to hold on to its treasure – the narrow waterway that controls nearly 20% of the world’s energy flows, Brew said. Whatever the outcome, it is unlikely that the Persian Gulf will return to a free flow of energy and trade, he added.
“The options are to escalate or do a deal. And I think that [Trump] The government will probably do the first, see it fail and end up with the second,” Brew said.
When the 60-day interim peace agreement was reached in mid-June, traffic through the strait increased again, but not to normal levels, and energy prices plunged as oil markets predicted even temporary oversupply. The global oil benchmark fell from a high of $124 a barrel in early May to $68 in early July, below expectations. However, on July 17, the price of oil rose again to over $88 per barrel. Global inventories have dwindled – US strategic petroleum reserves are at a 43-year low – the US midterm elections are approaching and China, which has sharply reduced its imports and relied on its high reserves to balance the global market, has not yet started buying more oil.
“All signs point to higher prices and a longer duration,” said oil forecaster Dan Pickering, founder of consulting and research firm Pickering Energy Partners. “We are in the fifth month. We have fewer strategic reserves. We have less flexibility, fewer options. It is a more precarious starting point for the second round.”
Iranian determination
As tanker traffic increased in late June and early July, the U.S. encouraged more ships to take a southerly, flatter route closer to Oman through the Strait of Hormuz to avoid additional payments to Iran. The Iranian regime interpreted this as an existential threat and the ceasefire collapsed on July 7 when Iran opened fire on ships approaching the Omani coast.
Once again, the US launched strategic attacks on Iran, and Iran countered with attacks on its Gulf neighbors, including US military facilities. US forces have bombed Iran every night this week, including civilian bridges. The United Arab Emirates, Kuwait and Bahrain have acknowledged damage to their power grids or refineries by Iran. Kuwait said a water desalination plant had been hit for the first time, endangering the main source of drinking water for the Middle East’s population.
Trump even proposed an exorbitant 20% toll on traffic in Hormuz – and then quickly rejected it. The US continues to maintain that Iran should not be allowed to charge transit fees. Still, Brew said, it now seems “unrealistic” that an Iranian fee structure – or so-called “voluntary” payment system – can be avoided even though tolls violate international maritime law.
“The Iranians felt like they had won. They got out of the war [in June] “They believe they have a more permanent role in managing the Strait of Hormuz,” Brew said. “They see the war as a vindication of their view that the Strait essentially belongs to them.”
The 60-Day Memorandum of Understanding Treaty never properly addressed control of the Strait, and now it has been reversed. “The Iranians have shown time and time again that a strike against them only strengthens their resolve to maintain their position and not make concessions,” Brew added.
The average U.S. price for a gallon of regular unleaded gasoline rose back to $4 a gallon this weekend. During the war, the United States exported record amounts of oil and refined fuel, helping to drive refining margins to all-time highs while keeping prices high at the pump. Refinery outages – whether voluntary or not – in the Middle East, China and Russia are causing fuel prices to rise around the world.
With the U.S. midterm elections approaching in November and Trump wary of inflation and gasoline costs, analysts argued that U.S. acquiescence to Iran in Hormuz is becoming more likely. Iranian tanker fees could be reduced to a secondary issue.
“Any question about the impact of the toll on [oil] “The volume depends on a more fundamental question – whether the strait is even reliably open,” said Claire Jungman, director of maritime risk and intelligence at Vortexa.
If the U.S. cedes control to Iran, at least the strait would be open, although traffic may never fully normalize. As Iran’s Gulf neighbors are reluctant to pay fees, they will continue to divert as many barrels as possible through pipelines while quickly building new pipelines and ports to make Hormuz less relevant in the long run.
Spurred by war, the United Arab Emirates is doubling the size of its west-east pipeline and planning a new port in Fujairah to bypass Hormuz and ship more oil directly to the Gulf of Oman. Iraq is building the Basra-Haditha pipeline, creating connections to oil hubs in Turkey, Syria and Jordan.
Saudi Arabia has rapidly expanded its pipeline supplies to export oil across the Red Sea seabut new attacks by Iran-aligned Houthi rebels in Yemen could threaten the alternative path.
Iran could win the fight but lose influence in the long term, Pickering said. Its leverage is currently at its strongest and should decrease over time. “What we will have in five years are multiple export routes from the Middle East.” Instead of fighting over Hormuz routes closer to Iran or Oman, “those would be just two of perhaps six options for getting oil out of the Middle East.”
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Precarious oil supply
The Trump administration clearly believed that it – and Israel – could attack Iran hard and fast and force regime change or bend Iran to Trump’s will, similar to the Venezuelan operation in January that emboldened the president, Brew said. The administration ignored warnings that Iran was militarily stronger, more radicalized and had greater strategic and geographical influence.
Now U.S. commercial energy supplies and the Strategic Petroleum Reserve (SPR) are rapidly being depleted, and only China – which has cut its crude oil imports by almost 5 million barrels a day – has prevented prices from spiraling out of control. But China can only keep this up for so long before it starts buying more barrels.
“We are not in a crisis area [yet]”But at a time of great global uncertainty, there is less breathing room,” said David Russell, global head of market strategy at brokerage TradeStation. “Oil remains a key risk … given its importance to inflation and ultimately monetary policy.” The SPR draws cannot go on forever.”
Iran has clearly shown that the Strait of Hormuz has greater value, and that is why it is so insistent on maintaining control at all costs militarily and economically, waiting for the US, Pickering said. “We’ve seen how expensive it is to shut everything down. The irony is that the value was there for free before the start for all participants.
“So will you end up worse off? Yes.”
And the U.S.’s ability to move forward is very limited, Brew said: “Trump can escalate the conflict and potentially lead to a conflict that causes even more damage and drives up oil prices even further.” Or he can try to outlast Iran, a middle course that is unlikely to succeed. Or he will leave the strait to Iran to reopen.
With emergency oil supplies not yet exhausted and the price per barrel remaining below $100, Brew expects Trump to attempt an escalation now, before he feels like he’s truly running out of options in a month or two.
“My feeling is that things are going to get worse before they get better,” Brew said. The US is intensifying its attacks and Iran is targeting more of its Gulf neighbors’ energy infrastructure, including possibly Saudi Arabia’s traffic in the Red Sea, he added.
Even another peace deal is unlikely to last, he said. “There will be no complete solution. There will likely be ongoing unrest, ongoing skirmishes and hostilities. I expect nothing more lasting than an interim agreement that allows traffic to resume to some extent.”
In the meantime, “We will see more fireworks over the next two to three weeks before we see any progress toward de-escalation or agreement.”