The Opening of Trump’s Box

President Trump’s address to the nation on—I want to say Iran?—provided no real information on when his war of choice would end, outside of the kind of assurance you get from a plumber doing work on your house that it will all wrap up in about two weeks.

But even if Trump announced the immediate cessation of hostilities and drove to the Pentagon to pull back the bombers personally, the implications of his decision to attack Iran are already determined, and eventually the investors wishcasting that everything will soon go back to normal will figure that out. This war has been an elaborate, destructive way to teach Iran a lesson, and unfortunately for the U.S., Israel, and the world, that lesson has been: Iran controls the Strait of Hormuz.

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This is new information to Iran. The country had not been monetizing its geographic good fortune of having 20 percent of the world’s oil, 20 percent of the world’s liquefied natural gas, and one-third of the world’s nitrogen-based fertilizer pass near its shoreline. Closing the strait was always an implied threat that would result from aggressive action against the nation or its leadership, something known to everyone in the world except Donald Trump, it appears. But the threat was typically closure, and what’s emerging is something quite different. Iran has slowly realized that, unbelievably, it can actually get away with throwing a tollgate across the strait. Thanks to Trump and Israel, Iran has gained immense economic and diplomatic leverage.

This means that the outcome of the war is immaterial from an economic standpoint. There will now be a permanently higher cost to shipping in one of the world’s most important choke points, as a new middleman enters the picture. This will make oil, gas, fertilizer, and a host of other products either derived from or relying on these commodities permanently more expensive. This price level increase changes the calculations of entire economies and heightens the need for an energy transition. That could be hopeful for the planet as green technologies become even more urgently necessary. But in the short term, it leads to mass suffering, resource wars, and geopolitical chaos. Pandora and her box had nothing on Trump.

IRAN’S SHIFT FROM SABOTEUR TO CUSTOMHOUSE arrived slowly. At first, practically no ship would dare cross the strait; traffic fell 97 percent between March 1 and March 25. Then the negotiations began with countries deemed friendly to the Iranian cause: China, India, Pakistan, Malaysia, even Iraq. There were rumors of payments of $2 million per ship. In the before times, close to 138 ships passed through the strait every day; at $2 million a pop, that comes out to about $100 billion in revenue for Iran—more than one-quarter of Iran’s nominal GDP, and nearly twice the country’s annual budget. Unlike the U.S., these tariffs really can fund the country.

On March 22, Iran decreed that “non-hostile” ships from countries not participating in the war would be allowed through. This flow was necessary for crossing to become a business model. Within days, Iran drafted and passed a law formally imposing tolls, designed to assert “sovereignty, control and oversight” over the waterway. That officially established a tollbooth that was, practically speaking, already in effect.

There will now be a permanently higher cost to shipping in one of the world’s most important choke points, as a new middleman enters the picture.

The risk premium for passage on the strait had always been reflected somewhat in commodity prices, which rose when tensions in the Middle East increased. But now they are directly embedded into the cost of shipping and can really rise at the whim of the Iranian parliament. Its factories can be bombed, its oil prohibited from finding a buyer; but its operational control of the strait cannot be sunk, as even the mighty U.S., in its more candid moments, has acknowledged. The only way to stop it would be a monthslong naval escort mission or yearslong ground occupation; the Trump administration has no stomach whatsoever for either option. Witness Secretary of State Marco Rubio conceding that a “tolling system” would be set up in the strait, and that someone else ought to do something about it. Or witness Trump, regardless of what he says in public, admitting in private that the war could end without the strait functioning as it had before the bombing began.

So no, the strait will not reopen “automatically,” as Trump absurdly suggested this week. If anything, Iran will take from the experience that they and allies like the Houthis in Yemen should find more straits, like the Bab-el-Mandeb strait on the Red Sea, to seize control of. After all, two tolls are better than one.

What is the real-world impact? It is true that $2 million per vessel is a marginal cost in the grand scheme, as little as 1 percent of the value of the average container ship. But that is an erratic number that could be increased at any time, and likewise the strait could be shut down periodically to facilitate that increase. The cost is less prohibitive than the volatility and uncertainty, particularly if the definition of a “hostile” ship keeps changing.

Oil prices rose 60 percent in March, the fastest one-month gain since the invasion of Kuwait in 1990. The reserves that some characterized as a global glut in oil have completely dissipated in a matter of weeks. In an Iranian tollbooth scenario, it’s hard to see prices dropping over the long term, if it doesn’t increase further. The throttling of the strait in March already produced, as analyst Rory Johnston puts it, “the world’s most severe energy supply crisis in history.” The future will just be a maintenance of those prices, which will be too steep for poor countries and an effective tax for the industrialized world.

THE ACTUAL PHYSICAL SHORTAGES haven’t hit yet, because it takes weeks to transport oil to refineries and then its ultimate destination, and because petroleum reserves and taking down sanctions have absorbed some of the shock. But inventories have been drawn down and the real shock is almost under way. “This is no longer a market that is tight for a couple of weeks, it is a market that will be fragile for longer,” wrote oil analyst Paola Rodriguez-Masiu of Rystad Energy.

Ships that are moving these days have been carrying more shipping fuel and forgoing cargo, which delays those supplies and increases prices. So there are knock-on effects here, and they are across the energy space. Natural gas exports, particularly from Qatar (which lost a large chunk of its capacity from an Iranian missile attack), have also been diminished. Much of that missing gas would have gone to Asian countries that produce a lot of the world’s industrial output, including semiconductors in Taiwan that produce most high-end chips.

This does not end at filling up your car or heating your house. Obviously, there are impacts for interior shipping with trucks that run on diesel fuel, as well as air travel using jet fuel. Both have nearly doubled in price since New Year’s Day, and this will broadly affect retail prices for goods, costs for industrial operations like mining or chemical extraction, and travel prices for business and tourism.

Then there are the impacts to products derived from oil and gas, like fertilizer, as the Prospect discussed this week. Much of the production of helium, a by-product of natural gas, comes from Qatar; commodity shortages affect MRI machines and, once again, several stages of semiconductor manufacturing, some of the most in-demand items in the world given the data center buildout for artificial intelligence modeling. The containers that transport helium were stranded in the Persian Gulf, so it’s going to take months to reposition them even if supplies were at normal levels. Helium is one among an array of petrochemicals derived from oil and gas that are in short supply right now.

Iran War Sends Fertilizer Prices Sky-High

And because central banks try to solve inflation by raising the cost of money through interest rates, the Strait of Hormuz situation is going to affect your mortgage rates, or your car loan. Already, borrowing costs from governments have been hit by the uncertainty. The last oil-derived inflation took a couple of recessions to get under control. We have a somewhat less oil-reliant system now, but only somewhat.

The biggest frustration about Trump’s Box is that it shouldn’t exist at all. We had 40 years of warnings about the dangers of a fossil fuel–led energy system, and countless wars with massive losses of lives and treasure in the Middle East due, at least in part, to our inability to shake the oil addiction. Jimmy Carter was warning about this exact security vulnerability almost 50 years ago. We had every opportunity to build and innovate our way out of this mess, and we never fully took the off-ramp. Even when we started down it a few years ago with the Inflation Reduction Act, oil wealth and oil lobbyists steered us back onto this perilous path.

This is also true of hyper-globalization, which has been identified as a hidden source of risk in these pages for decades. This is the third major disruption to the global supply chain since 2020: first COVID, then Ukraine, and now this. We could have recognized that unstable weather, unstable geopolitics, and unstable public health will accelerate the frequency of these supply shocks as long as we maintain these complex interdependencies demanded by financialized markets. And we could have re-engineered the resiliency we desperately need to reduce these growing risks. But we didn’t.

Instead, we took one of the stupidest actions by any head of state in recent memory to open this box. I hesitate to call it a crisis, because that assumes it can be resolved. There’s no going back to the status quo from this. The box will not be closed.

It’s a hinge point in history. You could see countries muddling through, building other pipelines and export hubs to avoid the strait, or just paying the toll. You could see a backsliding into using whatever is most readily available, which could be coal, regardless of the impact on the environment. Or you could see this moment yield the kind of reckoning that would turn Trump, impossibly, into the catalyst for a Green New Deal. As economist Dean Baker observed, rising oil and gas prices could send people searching for what are now less expensive sources of energy like solar and wind, and for electric vehicles powered by them. Chinese EV sales, for instance, are already exploding in Asia. Once you install clean energy, you don’t have to wait for tollbooth collectors thousands of miles away to give you access to the sun or the wind.

Where we go at this hinge point will be the biggest decision for the world over the next couple of years. Trump’s Box will cause incredible amounts of pain, but maybe also it will release a bit of hope.