With the Strait of Hormuz (SoH) once again closed to shipping because of the renewed hostilities between the United States and the Islamic Republic of Iran (over control of the SoH), an unprecedented volume of crude from normal trade was met by inventories, rerouting, and falling demand, cushioning the shock. Today, the challenge is no longer about finding crude oil. It’s a transportation problem that is creating an energy shock.
When the SoH first closed after the outbreak of the Iran War in February, many analysts predicted that crude oil would rocket to unprecedented levels. While oil prices increased significantly from their historic lows, they never reached the catastrophic highs most oil analysts anticipated. That’s partly because the People’s Republic of China (PRC) voluntarily removed itself from the market, relying solely on its 1.4 billion-barrel-strong Strategic Petroleum Reserve (SPR). The United States, too, relied heavily on its own SPR (around 400 million barrels of oil at the start of the conflict).
President Donald J. Trump attends Superbowl LIX between the Philadelphia Eagles and the Kansas City Chiefs, Sunday, February 9, 2025, at Caesars Superdome in New Orleans, Louisiana. (Official White House Photo by Daniel Torok)
President Donald Trump attends the National Prayer Breakfast, Thursday, February 6, 2025, at the U.S. Capitol in Washington, D.C. (Official White House Photo by Molly Riley.)
So, prices stabilized more quickly than previously expected, leading many to conclude that the fears of a closed SoH were overblown. But those Pollyanna-ish analysts conflated a temporary stopgap with a permanent solution to a much bigger, systemic problem. Now, the energy buffers that the SPR provided are fading as the SPRs of both China and the United States dwindle precipitously the longer the war lasts.
Meanwhile, some producers managed to reroute their exports via alternative routes, such as pipelines. This scenario has played out significantly in the case of Saudi Arabia, which used its pipeline network to divert exports that would usually have gone to market via the SoH to Saudi Arabia’s Red Sea ports. And because the markets generally assumed the disruptions would be temporary, they assessed that the world would ride the energy shock relatively well.
The Ceasefire Changed Everything
Indeed, the brief ceasefire negotiated between the Trump administration and the Islamic Republic of Iran appeared to validate the optimism felt by many experts. Markets calmed over the last two weeks as traders anticipated that shipping routes would normalize and oil prices would ease. Barely 18 days into the ceasefire, though, Washington resumed military operations against Iran.
Tehran responded with aggressive counterattacks on American military facilities throughout the Persian Gulf. All the while, both sides asserted competing authority over navigation through the SoH. That renewed fighting has now fundamentally changed market psychology.
Instead of asking when the Strait would reopen next week, investors began wondering whether this conflict had entered a prolonged phase (it has). To compound matters, the answers to those investor queries matter far more than the daily price of crude oil. Consider this: the very moment that the Trump administration restarted hostilities with Iran over the SoH, and unlike previous rounds of violence, gasoline prices spiked–meaning markets were no longer trusting that the energy buffers provided by the SPR or presidential Truth Social posts were reliable.
Financial markets, too, became highly volatile as traders struggled to determine whether this represented another temporary disruption or the beginning of a much longer war.
Inflation’s New Driver
Rising fuel costs translate into higher inflation levels because transportation underpins virtually every sector of the economy. Therefore, higher diesel prices raise shipping costs. Inevitably, that increases food prices for Americans. Manufacturers then pay more to transport raw materials and finished products. Airlines face higher fuel bills, too. Eventually, consumers absorb all these cost increases through higher prices across the entire economy.
Here’s where we move into monetary policy.
In a high-inflation environment (driven by higher-than-usual energy prices), interest rates must rise to suppress consumer demand. Monetary policy cannot escort oil tankers through contested waters. Nor can monetary policy repair damaged refineries or produce additional diesel fuel. If inflation remains elevated due to energy shortages (rather than excessive consumer spending), policymakers face the uncomfortable prospect of maintaining high interest rates without addressing the underlying cause.
The Real Bottleneck: Transportation
But the real bottleneck isn’t even the energy anymore. It’s the supply chain itself—the transportation. A tanker stranded inside the Persian Gulf does little to reduce gasoline prices in Tokyo, Rotterdam, or Tampa Bay. Even after the temporary ceasefire allowed some vessels to leave the SoH, shipping never returned to its prewar level of 140 vessels per day. Over those 18 days of relative peace, only about 140 vessels per week were allowed to pass.
Because of that decline, insurance premiums remained high. Ports became congested. Shipping companies hesitated to send crews through an active combat zone. Plus, Iran insisted it could regulate commercial navigation as it saw fit, rather than in accordance with international legal standards in place before the war began on February 28.
The Refining and Supply Chain Crisis
And the downstream effects have been devastating.
Everything from refined products to agricultural machinery to transportation has slowed, thanks to the collapse of transportation through the SoH. Indeed, several major refineries across the Greater Middle East have experienced disruptions since the war began on February 28. Plus, refining capacity elsewhere in the world faces additional pressure from all manner of other issues–ranging from technical to geopolitical. So, there is a growing disconnect between crude oil and refined fuel markets today.
Crude prices have softened even as gasoline, diesel, jet fuel, and industrial lubricants get more expensive. Consumers suffer. That becomes the basis of much larger sociopolitical problems, notably in a country like America.
Anyway, unlike gasoline, which consumers can temporarily reduce consumption of, proper lubricants are vital for the safe operation of automobiles, aircraft, heavy equipment, factories, and military vehicles. A shortage of motor oil can become an industrial problem long before it becomes a political one.
China’s Advantage–and America’s Vulnerability
Of course, demand patterns are changing in unexpected ways. Globally, oil demand has weakened as higher prices and slower economic growth encourage austerity measures. Much of Asia has reduced its petroleum consumption, while China has relied heavily on its own SPR and an increasingly diversified energy profile (renewables). Beijing has expanded nuclear power and electric vehicle (EV) production and modernized its overall energy infrastructure over the past decade.
America, on the other hand, has been cutting its investment in renewables, has not built a new major oil refinery since the 1970s, and has refused to modernize its own energy grid since the Carter administration. Meanwhile, as Asia conserves, Americans continue consuming massive quantities of dwindling fuel supplies. Thus, American consumers remain particularly vulnerable to prolonged disruptions in refined fuel markets.
Energy security isn’t about producing more oil, contrary to what most Americans think. It’s a comprehensive problem set that requires similar variegated solutions. Diversification, as China has demonstrated, is the best path to ensuring survivability during energy and/or global transportation crises resulting from geopolitical disruptions of the kind we face today, rather than an ideological commitment to any single source.
America’s Next Strategic Test
The Iran War has demonstrated how vulnerable the Americans are to these problems. We’ve told ourselves we’re a net exporter of oil and natural gas. That statement is only partly true. Yet we are not invulnerable to these disruptions from abroad because we have refused to insulate ourselves from the world’s varying instabilities.
Can the United States ensure that today’s energy disruptions stemming from its foreign policy toward Iran remain a temporary wartime shock, or will Americans fail to adapt adequately and, therefore, turn that temporary crisis into a prolonged period of inflation, industrial strain, and slower economic growth?
The benchmark price of crude oil no longer tells the whole story. The measure of this crisis increasingly lies in the resilience–or fragility–of the global energy system itself.
About the Author: Brandon J. Weichert
Brandon J. Weichert is the Senior National Security Editor. He also manages The Weichert Brief on Substack. Weichert also hosts “National Security Talk” on Rumble. He is the author of four bestselling national security books, the most recent of which is A Disaster of Our Own Making: How the West Lost Ukraine (Encounter Books). Follow him via Twitter/X @WeTheBrandon.
