As the war in Iran enters its fourth week, attacks on the region’s energy infrastructure are disrupting the economy around the world. The price of oil reached nearly $120 a barrel, up from around $80 just a little more than a week ago. International shipping through the Strait of Hormuz is effectively closed. And the local economies of Persian Gulf countries, including the United Arab Emirates and Saudi Arabia, continue to come under direct attack.
Why does the U.S. government seem so unprepared for the closure of the Strait of Hormuz? How do insurance markets work for ships that now want to pass through the Persian Gulf? And what role is Iran’s geography playing in the war?
As the war in Iran enters its fourth week, attacks on the region’s energy infrastructure are disrupting the economy around the world. The price of oil reached nearly $120 a barrel, up from around $80 just a little more than a week ago. International shipping through the Strait of Hormuz is effectively closed. And the local economies of Persian Gulf countries, including the United Arab Emirates and Saudi Arabia, continue to come under direct attack.
Why does the U.S. government seem so unprepared for the closure of the Strait of Hormuz? How do insurance markets work for ships that now want to pass through the Persian Gulf? And what role is Iran’s geography playing in the war?
Those are just a few of the questions that came up in my recent conversation with FP economics columnist Adam Tooze on the podcast we co-host, Ones and Tooze. What follows is an excerpt, edited for length and clarity. For the full conversation, look for Ones and Tooze wherever you get your podcasts. And check out Adam’s Substack newsletter.
Cameron Abadi: The closure of the Strait of Hormuz is a scenario that has long been predicted as part of a war with Iran. So why does the U.S. government seem so taken by surprise by the economic fallout? Have the effects been even more severe than the predictions entailed? Or is this just a basic failure to reckon with what the predictions envisioned?
Adam Tooze: This war has been exposing the extraordinary web of interconnections that keep the modern economy going. And we are now going beyond the closure of the strait to exchanges of fire. Most recently, the Israeli attack on the Iranian gas infrastructure, to which they then promptly responded by attacking Ras Laffan, the world’s largest LNG [liquefied natural gas] facility in Qatar. Absolutely tit-for-tat, straight back. The Qataris were able to stop the first wave of attacks, and then a bunch of missiles and drones got through on the second wave, apparently. And this is a real disaster. This causes permanent damage, or at the very least very long-lasting damage. This isn’t just a matter of straits closure anymore, but a matter of actual attacks on physical infrastructure. And there’s just the dawning realization that even if this war in some way can be brought to a cease-fire, of course the entire region will never be the same again.
And I think that’s what’s really sinking in with time. It’s taking a while, it should be said. The energy market is fluctuating wildly. That’s one of the most important aspects here, is just the scale of the fluctuations. But there’s also a sense of a slightly Wile E. Coyote moment in the rest of the financial markets, because they haven’t moved as much as many people would anticipate. So maybe this is really going to blow over, and as they say in the markets, they’ll see through it, or maybe this is like February 2020 when the COVID pandemic had broken out in Wuhan and the penny hadn’t dropped that in March this was going to lead to complete bedlam in the West. So we may be just a few weeks away from something even more dramatic happening.
CA: So the financial markets are predicting this will be a short war—is that what’s implied there?
AT: I’m right now at an investor conference. I just got off the phone with a hedge fund. And when you probe this, do they really have a thesis? Twenty minutes into the conversation, it becomes clear that no one actually has a concrete idea, and they don’t know more than anyone else.
And so right now it’s a matter of, well, the market is still ticking. So, famously, as long as the music plays, you dance. And there’s not a lot of upside to backing out of the market too quickly. On the other hand, there doesn’t also seem to be a huge amount of enthusiasm right now for buying the dip. So there’s a sense that we might be one or two big shocks away from a real crack in confidence.
But when you ask the question: Do you understand what the implications of this war, per se, are for the constitutional order of the United States and whether it is any longer appropriate to consider the United States as a normal state? Which is, after all, deep down the big issue here, as far as America’s political economy is concerned, as this war is not congressionally sanctioned and is liable to require hundreds of billions of dollars in extra funding. And at that point, investors will really shut down. So I think there’s layers of denial about just how astonishing and egregious this rupture is.
CA: The question has been raised of whether the ships that are attempting or would attempt to pass through the Strait of Hormuz right now would have the insurance necessary to do so. What do the economics of insurance markets in this kind of wartime scenario even look like?
AT: Well, the thing you can’t get anymore is standard Lloyd’s of London war insurance, because there’s a war, so no one in their right mind would insure you against it in that way. And that was affordable war insurance that any responsible operator would take out. You can get, apparently, specially tailored war insurance right now for shipments to the Strait of Hormuz. Apparently, that will run you as much as 5 percent of the value of the ship. So basically then the underwriter is assuming a 1-in-20 chance that this thing gets sunk. So if a moderately aged tanker is worth $100 million, then you’re paying $5 million for the trip. And given how narrow the margins are for this kind of business, that renders this uneconomic. That’s the state of play.
It’s worth saying as well that amongst one of the complicated timelines here is, you know, once the shooting stops, were it to stop, there’s then a rolling clock. A normal war insurance won’t kick back in again until there hasn’t been an incident for, depending on the grade of insurance, 30 days, 60 days, and so on, right? So even were the shooting to stop credibly, there wouldn’t be an immediate resumption of normal insurance. So costs will remain elevated. And there’s always a choice of where to deploy your assets. So why would you put something in harm’s way? Anyway, the insurance situation is a mess, and it’s clearly not been taken account of in advance by any kind of umbrella insurance being provided by the U.S. federal government or something.
CA: What kind of geopolitical factor is being played right now by Iran’s geography—its vast terrain, its mountain ranges, its long coastline?
AT: I think it’s crucial in the sense that it’s an element of Iranian invulnerability. As people sometimes cynically say, wars are a way of teaching us geography. So I now know that if you put Iran on top of the map of the continental United States, it covers the entire eastern seaboard. It’s basically like the United States up to the Louisiana Purchase, the entire thing. It’s the size of Texas, California, Illinois, and Montana put together and has about the same range of terrain as Texas, California, Illinois, and Montana put together. It has a coastline in the [Persian] Gulf and the Gulf of Oman of 2,000 kilometers. So this is absolutely gigantic.
So in terms of chasing down material, rockets, missiles: Even if you’re able to smash the formal military, you’re not going to be able to prevent Houthi-style guerrilla resistance. It’s extraordinarily naive, I think, now to imagine that even if you were to reduce the Iranian state to a totally failed state, you wouldn’t end the possibilities for retaliation.
And I think we’ve already seen that in that tellingly brief kind of surge of apparently serious news reports about a Kurdish incursion into Iran. That just all completely fizzled out within a matter of days. There’s talk about Kharg Island—which is their major facility for exporting Iranian oil—that the U.S. military might be considering some sort of special forces operation there. But even that’s a substantial piece of real estate. Kharg Island is not a small place.
So geography is a key element, I think. And it just makes any grandiose talk of boots on the ground and any kind of real invasion—I mean, that would be a thing of utter madness if the Americans were to attempt that, I think.
