Aftermath: Something Is Going to Snap

This story was first featured in the Aftermath newsletter, a series from David Dayen exploring the economic consequences of the war in Iran. To have these stories delivered to your in-box as soon as they are published, sign up for the newsletter here.

Hello and welcome to Aftermath, our pop-up newsletter about the war in Iran. The fact that there still is a war in Iran is our topic today. Read all of our past pieces in this series at prospect.org/aftermath.

You’re not going to believe this, but it turns out Donald Trump’s latest promise that he was going to get a great deal with Iran to open up the Strait of Hormuz—one of dozens of such promises—has, as ever, come to nothing. A core Iranian demand is that Israel stop carpet-bombing Lebanon, and Israel, with its contemptuous disregard for American interests and human life alike, instead has greatly stepped up bombing and its occupation of Lebanese territory.

Iran has therefore cut off contact with American negotiators, and the two sides are once again shooting at each other. Trump, for his part, recently told a CNBC reporter that “I really don’t care. I couldn’t care less” if negotiations are over. They “started to get very boring,” he added.

I’ll admit that when this started way back in February, I thought that something big would have broken in the global economy by now. Yet so far, despite some serious pain in certain areas—like global diesel prices—there hasn’t been a truly major crisis. But it’s only a matter of time before one or more of the severely strained parts of the global economy breaks.

Let me start with the factors that have so far helped prevent a major crisis. An important one is the green-energy transition. While very far from complete, it has provided the world with invaluable alternatives for energy and transportation. A great deal of fossil fuel energy can be replaced with solar, wind, and batteries, and a great deal of oil-based transportation can be replaced with electric vehicles—even freight trucking. Chinese exports of solar and EVs are soaring, and even very poor countries are buying in bulk. For a nation like Egypt, whose oil imports have been a crushing burden on a struggling economy, renewable energy is not about hippie-dippie environmentalism, it’s a matter of life and death.

Even for many industrial applications, drop-in replacements for fossil energy are widely available. As energy analyst Jan Rosenow writes, “Industrial heat pumps, electric boilers, electro-thermal storage and resistance heating can already replace large shares of low and medium-temperature [fossil fuel–generated] heat. These are not prototypes.”

A second factor is that many nations, particularly in Asia, have cut back their oil consumption through rationing and other controls. Somewhat to my surprise, an ersatz regional coordination bloc has emerged, as nations from Singapore to Japan have ironed out ways to help each other deal with the worst shortages.

A third more ominous factor is that the world has been heavily drawing down existing stocks of oil and natural gas. Many people saw the Iran war coming, and filled up every oil tanker and storage facility they possibly could. A great deal of that has since been used up. The vast storage complex at Cushing, Oklahoma (regarded as a storage benchmark), has declined from 33 million barrels to 24.5 million—and they can’t be fully emptied. “You can’t draw them down to zero because there is gunk at the bottom of the tanks,” oil analyst Matt Smith told CNN.

European nations have about 640 million barrels of storage capacity; they are down to perhaps 500 million. The U.S. Strategic Petroleum Reserve had about 415 million barrels before the war; it is down to 357 million, and being drawn down by another nine million per week. The Japanese reserve had about 350 million barrels; it is now down to about 270 million. China is undoubtedly tapping its own vast reserve, which is the largest in the world, but it does not publish official figures. (And what is true of the Cushing tanks is also true of these national reserves; the milkshake, as it were, cannot be fully drunk.) “We’re approaching unheard of inventory levels,” Exxon Senior Vice President Neil Chapman said at a recent conference. “Once you get to that point, then you’ll see price shoot up.”

A final factor is the behavior of the media and financial markets. The D.C. political press can be relied on to uncritically repeat Trump’s preposterous lies about an imminent deal, no matter how many times they have been proved false. Traders on oil and oil futures markets, being either deluded by the media or blinded by wishful thinking or simply incapable of believing that the president of the United States is as stupid and insane as he in fact is, have consistently expected the strait to open back up soon. (Nobody’s that nuts, right? Unfortunately, Trump absolutely is.) Oil prices again fell sharply after Trump’s latest promise. Sooner or later, oil traders are either going to face reality, or bankrupt themselves.

It’s important to note that reserve releases and comically underpriced oil futures are effectively subsidizing oil consumption. Allowing prices to increase in tandem with the reduced flow, or setting up rationing systems as poorer Asian nations have been forced to do, would incentivize individuals and businesses to use less oil. Instead, politicians around the world have encouraged their nations to continue using energy at normal levels, and therefore to chew through global inventories more quickly. That means if and when the supply shock hits, it will hit even harder.

That brings me to the crises that now loom in multiple sectors. The most obvious one is in oil itself. As storages dwindle and run out, the only way to match demand to supply will be for the price to rise high enough to destroy something like 10 to 20 percent of global oil consumption. And because a great deal of oil demand is obligatory and therefore not very price-sensitive, that price will likely be north of $150 per barrel. That means gas and diesel at the pump in the $8-to-$10 range, and a corresponding price hike for anything that needs to be transported, or involved in plastic in some way, which is to say basically everything—not to mention untold other problems.

Another developing disaster is in the aluminum market. Something like 10 percent of aluminum production used to come from countries around the Gulf. Global aluminum prices have risen, but until recently not by all that much, because as The Wall Street Journal points out, smelters around the world had a lot of raw material stockpiled. China was also making up some of the slack by removing its aluminum production caps, which had been in place to prevent swamping the market. Those stockpiles are now mostly gone, and worse, China is reportedly considering putting the caps back in place. Last month, the price of aluminum finally surpassed the peak seen in 2022 caused by the war in Ukraine, and at time of writing had increased by another $200 per ton, to about $3,800.

Agriculture is also getting pummeled. About a quarter of the global production of ammonia and diammonium phosphate go through the strait, as well as a third of urea and half of globally traded sulfur. All of these are vital for fertilizer production, and agriculture around the world has already suffered major disruptions, particularly in China and Africa. Many plantings are already finished, with poor harvests guaranteed for the fall. It might already be too late to prevent another bad year in 2027, as it will take a long time to get fertilizer supplies flowing again.

Another building problem is in key industrial commodities. About half of sulfur is used in agriculture, but the rest is a vital input in everything from mineral and metal refining to electronic manufacturing, in the form of sulfuric acid, the price of which has roughly doubled along with that of sulfur. This could ironically tie up the green-energy transition, as most key renewable technologies require sulfuric acid to be produced. China, a major sulfuric acid producer, has limited exports of that too.

Taken together, we are looking at a sustained inflationary pressure that might tip the world into a recession, as well as outright shortages of certain items, including food in some places, and major supply chain snarls similar to what we saw during and after the pandemic.

Even if the Strait of Hormuz opens tomorrow, these problems are going to take years to resolve. As we have been covering here at Aftermath, a great deal of expensive and delicate infrastructure around the Persian Gulf has been damaged or destroyed. Repairs and replacements will take years to finish. Oil fields take weeks or months to get pumping again. Nations are going to want to fill their reserves back up, meaning years of structurally higher demand. They might also want to build up reserves of other commodities as well.

And that’s if it doesn’t get worse. A fair amount of Gulf oil production is making it out via a Saudi pipeline to Yanbu on the Red Sea, where tankers bound for Asia can load up and exit via the Bab al-Mandab Strait. Now, Iran has threatened to close that one too, through its Houthi allies in Yemen. You know what they say: It’s always darkest right before it gets pitch-black.

Thanks for reading. If you have tips or ideas for future stories, let us know! You can email us at aftermath@prospect.org.