When geopolitical hubris collides with the harsh realities of international markets, words change quickly. In just twenty-four hours, the American President went from the contemptuous declaration that “we don’t need the Middle East”, to angry threats reminiscent of an ultimatum of war.
As fuel prices soar and the US economy feels the suffocation of the 20 million barrel bottleneck, it turns out that no one—not even a superpower—is truly immune to a global energy shock.
But what has changed since “the United States imports almost no oil through the Straits of Hormuz and will not in the future. We don’t need it”, in “”?
For starters, the price of oil.
US oil jumped more than 11% last Thursday, the day after his speech, to close above $111 a barrel, the highest price in four years and one of the biggest daily gains in history. Texas crude oil (WTI) was trading around $100 shortly before Trump’s speech, while it was below $70 before the war began.
Trump is right that the US relies too little on Middle Eastern oil that flows through the Strait of Hormuz, the narrow waterway through which 20% of the world’s oil typically passes. America gets only about half a million of the 20 million barrels of crude it consumes daily from the Straits, a very low amount that could be replaced with oil from other areas.
But Trump’s latest threat underscores a harsh truth: The health of the American economy depends on the Strait of Hormuz far more than the president has admitted.
Supply and demand
The United States has done a remarkable job over the past 15 years of reshaping its energy industry, thanks to the advent of fracking and horizontal drilling, particularly in the Permian Basin of Texas. America now produces about 22 million barrels of oil per day, double the output of Saudi Arabia (ranked 2nd) and slightly more crude than the US consumes daily.
America is energy independent. In a way. The United States still imports more than 6 million barrels of crude a day, about a third of what it consumes, and exports about 4 million barrels of oil daily.
That’s because not all oil is the same: America produces “light, sweet” crude, which is great for making gasoline but unsuitable for heating, asphalt and diesel, among other heavier derivatives. So the United States must import oil from places that produce “heavy, sub-sour” crude, including Venezuela and the Middle East.
Also, the oil market is global. When the supply is reduced in one region, all locations are affected. In times of tight supply like this, oil importers compete for any available barrel, pushing the price higher for whoever wants or needs it most, noted Dan Pickering, founder of Pickering Energy Partners.
So the US was and probably will remain well supplied with oil during the war with Iran. That’s not the big problem. The concern is that America is not immune to a global oil market price shock.
The energy economy
High energy prices are an obvious consequence of America’s war and Iran’s effective closing of the Straits of Hormuz. Crude prices remained high on Monday – around $110 a barrel – after Trump threatened to destroy Iran’s power plants and bridges. And US gas prices have risen to an average of $4.12 a gallon.
These high crude and gasoline prices are already having an impact on the US economy. Many middle- and low-income Americans, already weary of precision, are struggling with high prices at the pump, and some small businesses unable to raise their prices further are making difficult staffing decisions.
The biggest concern will arise if high prices destroy demand for gasoline and oil. Prices may fall as a result, but if oil and gasoline are too expensive for Americans to fill up their cars or fly, that could create significant problems for the economy.
How much will it take to damage the US?
It’s not easy for a $30 trillion economy to collapse. Although eight of the last nine recessions were caused by an oil price shock, the war is only five weeks old and may need to last months longer to cause recession-level damage to the US economy.
Wall Street analysts estimate that every $10 increase in a barrel of oil removes between 0.1 and 0.4 percentage points from the Gross Domestic Product (GDP). So the current $40 increase could take about a percentage point off GDP, which isn’t negligible, but not enough to cause a serious blow.
But this could quickly deteriorate if prices rise sharply. And oil isn’t the only factor: Anything delivered by truck will become more expensive as diesel prices soar. At the same time, a range of other imports across the Straits, such as aluminium, helium and fertilizers, will drive up prices in building materials, microchips and food.
Annual consumer inflation for March is expected to jump to around 3.5%, completely wiping out last year’s average wage increase for American workers.
“The US economy can absorb for a while the shock caused by oil above $100 a barrel,” said Joe Brusuelas, chief economist at RSM US. “But if that goes to $150 or $200 a barrel, then it’s a different story.”
The truth of the Straits of Hormuz
This could be a major factor in Trump’s renewed alarm over the Straits of Hormuz.
Trump has been arguing and contradicting himself about the Straits since the beginning of the war. His government has promised a naval escort for oil tankers to cross the Straits and has guaranteed insurance for ships that lost their cover from marine insurers.
He has also said that oil tankers should show courage and cross the waterway and that the Middle East’s most oil-dependent countries should help open the Straits themselves.
“Go find your own oil!” Trump posted on Truth Social on Tuesday.
Trump’s day-to-day rhetoric has sent oil prices tumbling, but oil has risen overall as it becomes clearer that Iran holds the cards in the Straits — and a US withdrawal from the war may not open the critical waterway to tanker traffic.
Traders worried last week that Trump had failed to present an exit strategy from America’s war with Iran and feared that his threats to escalate could cause more damage to crude supply.
Iran, meanwhile, has said it will collect a toll for safe passage through the Straits, a fee that many Gulf countries will likely refuse to pay. Even a partially open Strait would leave the world with a shortfall of between 4.4 and 8 million barrels per day, according to Citi global energy strategist Anthony Yuen.
Trump set a deadline of Tuesday at 8 p.m. (East Coast time) for Iran to open the Straits. It is unclear what Iran’s response will be. Or how or if the United States could convince Iran to reopen them.
