The Iran stan­doff and the future of oil

 

“Although the US and Iran are at war, their eco­nomic interests appear to coin­cide as far as oil prices go

 

JAMES K GALBRAITH Gal­braith, pro­fessor at The Uni­versity of Texas at Aus­tin, is the co-author (with Jing Chen), most recently, of ‘Entropy Eco­nom­ics: The Liv­ing Basis of Value and Pro­duc­tion’ (Uni­versity of Chicago Press, 2025). Copy­right: Project Syn­dica

8 May 2026

More than nine weeks into the three-day war on Iran — recently declared “over” by the White House even as threats con­tinue — it is not yet pos­sible to dis­en­tangle rationales and pre­texts. What was said in meet­ings, and by whom, even when a full account­ing emerges, will not neces­sar­ily be dis­pos­it­ive, because some unstated reason may still under­lie whatever argu­ment was made.

We do know that Don­ald Trump’s pres­id­ency is dom­in­ated by a real-estate cul­ture. The pres­id­ent, his fam­ily, key cab­inet mem­bers, advisers, and donors are drawn from the world of hotels, lux­ury resorts, and casi­nos. They are not law­yers, elec­ted officials, or lifelong bur­eau­crats, let alone col­lege pro­fess­ors. Prices and asset val­ues are their bread and but­ter. So, let us sup­pose that they have thought this through in terms of the eco­nom­ics of oil.

Our ana­lysis can start with the fact that the US is now the world’s largest oil pro­du­cer, owing to frack­ing in the Per­mian Basin of West Texas and south­east­ern New Mex­ico. With the estim­ated break-even price for Per­mian crude (about $65 per bar­rel) higher than the oil price was between July 2025 and Feb­ru­ary 2026, the well count in the Per­mian has fallen by about one-third since 2023, with pro­duc­tion reach­ing a record in 2025, thanks to improved efficiency. Argu­ably, the pre-war price was too low for sus­tained prof­it­able drilling, and so for the private-equity interests who had moved into the Per­mian Basin in 2020-21, when oil prop­er­ties were very cheap.

The effect of the war’s first month was to take oil sup­plies from the south­ern Gulf largely offl­ine, redu­cing global oil flows by about 10 per cent. From these basic facts, a valu­ation for­mula that Jing Chen and I present in our book Entropy Eco­nom­ics pre­dicts a price increase of 60 per cent. In the event, West Texas Inter­me­di­ate (WTI) crude rose by 60 per cent — from around $65 to $104 per bar­rel — dur­ing the first month of the war.

From the US pro­du­cers’ per­spect­ive, this was a good res­ult — a bit too good. When prices rise above $90 per bar­rel, cost-push infla­tion begins to bite at home, and Asia and Europe begin to suffer pain­ful short­ages (not only oil, but also sul­phur, urea, and helium). And if the price goes much higher, demand begins to fall. As the war con­tin­ued, prices surged above $110 per bar­rel until April 8, at which point the US declared a cease­fire, and they fell.

No one can ever be sure what Trump is think­ing, but he may have real­ised that another attack on Iran will not work. The Islamic Revolu­tion­ary Guard Corps has made clear that it would retali­ate by des­troy­ing crit­ical infra­struc­ture across the entire Gulf and in Israel. Accord­ing to our for­mula, a full shut-off of the Per­sian Gulf would drive the WTI price to about $155 per bar­rel, which would col­lapse the mar­ket and bring prices back down the hard way. The best res­ult for the US side, then, is an open Gulf with a reduced flow, yield­ing a US price between $80 and $100 per bar­rel.

The prob­lem is that if Iran con­trols the flow, this optimal price for the US is also very good for Iran. Indeed, Iran upped its pro­duc­tion in March, tak­ing mar­ket share from the blocked and dam­aged south­ern Gulf. The irony is strik­ing. Although the two coun­tries are at war, their gov­ern­ments’ eco­nomic interests appear to coin­cide. Of course, from the US-Israeli per­spect­ive, the wrong coun­try is bene­fit­ing from a par­tial shut­down of the Strait of Hor­muz.

The Trump admin­is­tra­tion thus respon­ded with a block­ade, though without enough ships to catch all the Ira­nian ones.

The choice of a block­ade implies hope for a deal, whose unstated pur­pose could be to sta­bil­ise the price in the desired range for the rest of Trump’s term. This would be a win-win for the US and for Iran implies hope for a deal, whose unstated pur­pose could be to sta­bil­ise the price in the desired range for the rest of Trump’s term. But it would likely mean sac­ri­fi­cing the US-allied Arab mon­arch­ies in the Gulf and deliv­er­ing a stra­tegic defeat for Israel. The United Arab Emir­ates’s depar­ture from OPEC might be read as a reac­tion to this pos­sib­il­ity; so, too, might Israel’s pres­sure to renew the war.

GIGANTIC GAME OF CHICKEN

The res­ult is a gigantic game of chicken, with the world eco­nomy on the block. Even a leaky block­ade might, over time, force Iran to fill its oil stor­age, and then to cur­tail pro­duc­tion. With that poten­tial lever­age, Trump has an interest in draw­ing out the face-off for as long as pos­sible. But naval deploy­ments can­not last indef­in­itely, and one dam­aged air­craft car­rier is already head­ing home.

If Iran can hold out, the US even­tu­ally will have to fold, and the oil price will fall as pro­duc­tion recov­ers. By tolling traffic through the Strait, Iran can then prosper at a lower price level, even with an entirely open Gulf and all taps flow­ing. As for the US, its own energy inde­pend­ence, and Europe’s recent depend­ence on US oil and lique­fied nat­ural gas, will gradu­ally decline. Much of the world would then have to turn to Rus­sia and to the Per­sian (now very “Ira­nian”) Gulf.

Trump and his people there­fore face a dilemma. They could col­lapse the world eco­nomy now (and maybe they will); they could walk away (and maybe they will), accept­ing both an imme­di­ate defeat and longer-term erosion of the US pos­i­tion; or they can stall and hope for a deal. And if an unpal­at­able deal is the best Trump can get, his interest is to stall for as long as pos­sible and pray for a mir­acle.

His prayer is unlikely to be answered, though. Iran is tough, and time is (mostly) on its side. The Ira­ni­ans know that the usual Amer­ican endgame (not unique to Trump) is to walk away from defeat, take the humi­li­ation, and move on. In that case, the oil price will fall, and even­tu­ally the private-equity interests in the Per­mian Basin will go bust. It may take a while to get there, with flip-flops and bom­bast along the way; but short of a global calam­ity (still a dis­tinct pos­sib­il­ity), this seems to be the way out.

In prin­ciple, the US could take another path over the longer term. Voters could kick out the spec­u­lat­ive class now in charge, and the coun­try could develop a national energy policy — and start pro­du­cing, pri­cing, and alloc­at­ing energy for the bene­fit of the whole US pop­u­la­tion. It could even return to the inter­na­tional com­munity as a part­ner, rather than as a would-be imper­ator.

Then again, one should never bet on something just because it is pos­sible.”