Oil is Still the Backbone of Global Stability
Despite years of energy transition rhetoric, oil remains the backbone of the global economy. Roughly one-fifth of the world’s petroleum consumption — about 20 million barrels per day — moves through the Strait of Hormuz, making it the most critical energy chokepoint on earth. Any credible threat to that corridor forces markets to reprice not just Iranian barrels, but the reliability of the entire global oil system.
This is not theoretical. Even short-lived disruptions — missile strikes, maritime harassment, cyberattacks, or insurance withdrawals — can tighten supply chains faster than producers can respond. Oil markets are global, prices are set at the margin, and logistics matter as much as geology.
The United States today imports relatively little crude directly from the Persian Gulf, but that does not insulate American households. Oil is priced globally. Refined products are traded globally. When disruption raises prices in Asia or Europe, U.S. consumers feel it at the pump, airlines feel it in jet fuel costs, and inflation resurfaces almost immediately.
Iran: The Strategic Reality
Iran: The Strategic Reality
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Iran: The Strategic Reality
Three Scenarios, One Common Theme: Risk Becomes Price
1. Scenario One: Limited Military Action — Price Shock Without Structural Damage
In the first scenario, military action is limited in scope and duration - targeted strikes, no sustained attacks on oil infrastructure, and no prolonged attempt to block shipping lanes. On paper, this is the “contained” case.
Yet even here, oil prices would rise sharply.
Markets would not be responding to lost supply so much as elevated risk. Tanker insurance premiums would increase. Freight rates would spike. Some shippers would delay sailings. Buyers would pull forward cargoes. All of this functions like a temporary supply cut even if production volumes remain unchanged.
In this scenario, prices could spike quickly — often overshooting fundamentals — before partially retreating as it becomes clear that flows continue. But the retreat would not be complete. Once a geopolitical premium is introduced, it tends to linger.
For U.S. households, the effect would be immediate but potentially short-lived: higher gasoline and diesel prices, airline fare pressure, and renewed inflation headlines. For allies in Asia — particularly Japan and South Korea, which rely heavily on Gulf crude — the impact would be more acute.
The lesson: even limited conflict raises costs, because markets price uncertainty faster than reassurance.
2. Scenario Two: Regional Escalation — When the Supply Chain Becomes the Weapon
The second scenario is more dangerous and more realistic: sustained regional escalation involving proxy forces, repeated maritime incidents, cyber disruptions, or episodic damage to energy infrastructure across the Middle East.
In this case, oil does not disappear — but it becomes unreliable.
Tankers hesitate. Insurers retreat. Ports slow. Refiners struggle to schedule deliveries. The problem is no longer how much oil exists, but whether it can be moved safely, on time, and at tolerable cost.
Here, spare capacity begins to matter - but only partially.
Yes, OPEC producers — primarily Saudi Arabia and the UAE — maintain several million barrels per day of spare production capacity. But spare capacity only stabilizes markets if it can be transported. Pipeline bypasses around Hormuz are limited, and alternative routes cannot replace the scale of seaborne exports.
Meanwhile, refined product markets tighten faster than crude markets. Gasoline, diesel, and jet fuel shortages emerge not because refineries lack crude, but because distribution systems are stressed. This is when price spikes become persistent rather than episodic.
For the U.S., this scenario brings a familiar pattern: rising fuel prices, pressure on consumer spending, and political urgency. For Europe, competition for Atlantic Basin crude intensifies. For Asia, governments turn to strategic stockpiles and emergency coordination.
This is the scenario where energy security overtakes climate and transition debates, because reliability becomes paramount.
3. Scenario Three: Sustained Disruption or Hormuz Closure — A True Oil Shock
The third scenario — sustained disruption of the Strait of Hormuz or direct attacks on major oil export infrastructure — would represent a systemic shock to the global economy.
Even partial obstruction matters. Markets do not require a full closure to panic. The credible threat of interruption is enough to send prices sharply higher, because inventories are finite and replacement routes are insufficient.
Iran’s own production — roughly 3 to 3.5 million barrels per day — would likely fall sharply in this scenario. But the real issue is not Iran alone. It is the vulnerability of Gulf exports more broadly.
Could spare capacity absorb the shock? Only partially, and only with time.
OPEC spare capacity can offset lost production, but it cannot instantly replace lost logistics. Strategic petroleum reserves can smooth short-term shortages, but they are finite and politically constrained. Demand destruction eventually occurs — but only after prices rise high enough to slow economic activity.
This is where oil shocks bleed directly into macroeconomic risk: inflation accelerates, growth slows, and policymakers face an impossible tradeoff between energy costs and economic stability.
1. Scenario One: Limited Military Action — Price Shock Without Structural Damage
In the first scenario, military action is limited in scope and duration - targeted strikes, no sustained attacks on oil infrastructure, and no prolonged attempt to block shipping lanes. On paper, this is the “contained” case.
Yet even here, oil prices would rise sharply.
Markets would not be responding to lost supply so much as elevated risk. Tanker insurance premiums would increase. Freight rates would spike. Some shippers would delay sailings. Buyers would pull forward cargoes. All of this functions like a temporary supply cut even if production volumes remain unchanged.
In this scenario, prices could spike quickly — often overshooting fundamentals — before partially retreating as it becomes clear that flows continue. But the retreat would not be complete. Once a geopolitical premium is introduced, it tends to linger.
For U.S. households, the effect would be immediate but potentially short-lived: higher gasoline and diesel prices, airline fare pressure, and renewed inflation headlines. For allies in Asia — particularly Japan and South Korea, which rely heavily on Gulf crude — the impact would be more acute.
The lesson: even limited conflict raises costs, because markets price uncertainty faster than reassurance.
2. Scenario Two: Regional Escalation — When the Supply Chain Becomes the Weapon
The second scenario is more dangerous and more realistic: sustained regional escalation involving proxy forces, repeated maritime incidents, cyber disruptions, or episodic damage to energy infrastructure across the Middle East.
In this case, oil does not disappear — but it becomes unreliable.
Tankers hesitate. Insurers retreat. Ports slow. Refiners struggle to schedule deliveries. The problem is no longer how much oil exists, but whether it can be moved safely, on time, and at tolerable cost.
Here, spare capacity begins to matter - but only partially.
Yes, OPEC producers — primarily Saudi Arabia and the UAE — maintain several million barrels per day of spare production capacity. But spare capacity only stabilizes markets if it can be transported. Pipeline bypasses around Hormuz are limited, and alternative routes cannot replace the scale of seaborne exports.
Meanwhile, refined product markets tighten faster than crude markets. Gasoline, diesel, and jet fuel shortages emerge not because refineries lack crude, but because distribution systems are stressed. This is when price spikes become persistent rather than episodic.
For the U.S., this scenario brings a familiar pattern: rising fuel prices, pressure on consumer spending, and political urgency. For Europe, competition for Atlantic Basin crude intensifies. For Asia, governments turn to strategic stockpiles and emergency coordination.
This is the scenario where energy security overtakes climate and transition debates, because reliability becomes paramount.
3. Scenario Three: Sustained Disruption or Hormuz Closure — A True Oil Shock
The third scenario — sustained disruption of the Strait of Hormuz or direct attacks on major oil export infrastructure — would represent a systemic shock to the global economy.
Even partial obstruction matters. Markets do not require a full closure to panic. The credible threat of interruption is enough to send prices sharply higher, because inventories are finite and replacement routes are insufficient.
Iran’s own production — roughly 3 to 3.5 million barrels per day — would likely fall sharply in this scenario. But the real issue is not Iran alone. It is the vulnerability of Gulf exports more broadly.
Could spare capacity absorb the shock? Only partially, and only with time.
OPEC spare capacity can offset lost production, but it cannot instantly replace lost logistics. Strategic petroleum reserves can smooth short-term shortages, but they are finite and politically constrained. Demand destruction eventually occurs — but only after prices rise high enough to slow economic activity.
This is where oil shocks bleed directly into macroeconomic risk: inflation accelerates, growth slows, and policymakers face an impossible tradeoff between energy costs and economic stability.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group