Summary
Nearly five months into the war in Iran, the conflict has entered a “second round” as bombs fly throughout the Middle East after a temporary truce collapsed. Iran is again threatening passage through the now-infamous Strait of Hormuz, while the U.S. has reinstated a naval blockade on Iranian oil exports.
As the world’s emergency petroleum supplies dangerously dwindle and prices again rise, the Trump administration appears to have lost the upper hand and faces a stark choice: escalate the conflict in a prolonged morass resembling Ukraine, or capitulate and let Iran control the world’s leading energy artery—with the ability to charge service fees for passage and recoup costs, a toll in all but name— energy and geopolitical analysts told Fortune.
The decision could shape energy and fuel prices heading into the fall, including the midterm elections, and set a precedent for how far the U.S. will go to defend global shipping lanes.
“I don’t think there’s any military option for reopening the Strait of Hormuz,” said Gregory Brew, senior analyst for Iran and energy with the Eurasia Group. “The Iranians have considerable leverage here. I don’t see them backing down and, honestly, time is probably on their side.”
Despite being militarily battered and with much of its leadership killed early in the war, the Iranian regime remains steadfast and determined to hold onto its prize—the narrow waterway that controls nearly 20% of the world’s energy flows, Brew said. Whatever the result, the Persian Gulf is unlikely to return to a free flow of energy and trade, he added.
“The options are to escalate or cut a deal. And I think the [Trump] administration is likely to do the first, see it fail, and end up with the second,” Brew said.
When the 60-day, interim peace deal was reached in mid-June, traffic through the strait began to resume—but not to normal levels—and energy prices plunged as oil markets even began to predict a temporary glut. The global oil benchmark fell from a high of $124 per barrel in early May down to $68 at the start of July, lower than expected. Already though, it surged back above $88 per barrel as of July 17. Global stockpiles are dwindled—the U.S. Strategic Petroleum Reserve is at a 43-year low—U.S. midterm elections are approaching, and China, which sharply cut its imports and leaned on its hefty reserves to help balance the global market, hasn’t yet started buying more oil.
“All of the signs point to higher prices and a longer duration,” said oil forecaster Dan Pickering, founder of the Pickering Energy Partners consulting and research firm. “We’re in the fifth month of this. We have fewer strategic reserves. We have less flexibility, less optionality. It’s a more precarious starting point for round two.”
Iranian determination
As tanker traffic rose in late June and early July, the U.S. encouraged more vessels to take a southern, shallower route closer to Oman through the Strait of Hormuz to avoid making extra payments to Iran. The Iranian regime interpreted this as an existential threat and the ceasefire broke down on July 7 when Iran opened fire on vessels hewing closer to the Omani shoreline.
Yet again, the U.S. launched strategic attacks on Iran, and Iran countered with strikes on its Gulf neighbors, including at U.S. military installations. U.S. forces have bombed Iran every night this week, including civilian bridges. The United Arab Emirates, Kuwait, and Bahrain acknowledged damage to their power grids or refineries from Iran. Kuwait said a water desalination plant was hit for the first time, threatening the primary source of drinking water for the Middle East’s population.
Trump even proposed—then quickly shelved—an exorbitant 20% toll on Hormuz traffic. The U.S. position remains that Iran cannot be allowed to charge fees for passage. Still, Brew said it now seems “unrealistic” that an Iranian fee structure—or a so-called “voluntary” payment scheme—can be avoided, even though tolls violate international maritime law.
“The Iranians felt that they won. They came out of the war [in June] believing they were entitled to a more permanent role in managing the Strait of Hormuz,” Brew said. “They see the war as having justified their view that the strait essentially belongs to them.”
The 60-day memorandum of understanding treaty never properly addressed control of the strait, and now it’s undone. “The Iranians have illustrated time and again that if you hit them, it only strengthens their resolve to maintain their position and avoid giving any concessions,” Brew added.
The average U.S. price for a gallon of regular unleaded has climbed back to $4 a gallon again this weekend. During the war, the U.S. has exported record volumes of oil and refined fuel, helping push refining margins to all-time highs while keeping prices at the pump inflated. Refinery outages—voluntary or not—in the Middle East, China, and Russia are keeping fuel prices higher worldwide.
With the U.S. midterm elections approaching in November and Trumply keep aware of inflation and gasoline costs, analysts argued that U.S. acquiescence to Iran over Hormuz becomes more likely. Iranian fees on tankers may be reduced to a secondary concern.
“Any question about tolling’s impact on [oil] volumes is downstream of a more basic one—whether the strait is reliably open at all,” said Claire Jungman, director of maritime risk and intelligence for Vortexa.
If the U.S. cedes control to Iran, at least the strait would be open, even if traffic may never fully normalize. With Iran’s Gulf neighbors hesitant to pay fees, they will keep diverting as many barrels via pipelines as possible while rapidly building new pipelines and ports to render Hormuz less relevant long term.
Spurred by the war, the UAE is doubling the size of its West-East pipeline and planning a new Fujairah port to bypass Hormuz and move more oil directly into the Gulf of Oman. Iraq is building the Basra-Haditha Pipeline, creating pathways to oil hubs in Turkey, Syria, and Jordan.
Saudi Arabia has rapidly expanded pipeline shipments to export oil through the Red Sea, but new attacks from the Iran-aligned Houthi rebels in Yemen could threaten the alternate route.
Iran may win the battle but lose influence long term, Pickering said. Its leverage is strongest right now and should diminish over time. “What we’re going to wind up with in five years is multiple export routes out of the Middle East.” Instead of fighting over Hormuz routes closer to Iran or Oman, “Those would just be two of maybe six ways to get oil out of the Middle East.”
Precarious petroleum supplies
The Trump administration clearly believed it—and Israel—could strike Iran hard and fast, forcing regime change or bending Iran to Trump’s will, similar to the Venezuelan operation in January that emboldened the president, said Brew. The administration failed to heed warnings that Iran was stronger militarily, more radicalized, and held more strategic and geographic influence.
Now, U.S. commercial energy stockpiles and the Strategic Petroleum Reserve (SPR) are rapidly being depleted, and only China—which has slashed its crude imports by nearly 5 million barrels a day—has kept prices from spiraling out of control. But China can only keep that up for so long before it starts to buying more barrels.
“We’re not in crisis territory [yet], but there’s less breathing room at a time of intense global uncertainty,” said David Russell, global head of market strategy at the TradeStation brokerage firm. “Oil remains a top risk…given its importance in inflation and, ultimately, monetary policy. The SPR draws can’t continue forever.”
Iran has clearly demonstrated the heightened value of the Strait of Hormuz, and that’s why it’s so insistent on maintaining control at any cost militarily and economically to wait out the U.S, Pickering said. “We’ve seen how expensive it is to shut everything off. The irony is before all this started that value was there for free for all the participants.
“So, are you going to wind up worse off? Yes.”
And the U.S. has very limited options pressing forward, Brew said.“Trump can escalate and potentially widen the conflict to one that causes even more damage and pushes oil prices even higher.” Or he can try to outlast Iran, a middle path that seems unlikely to succeed. Or he cedes the strait to Iran to reopen it.
Because emergency oil stockpiles aren’t depleted—yet—and the price per barrel remains below $100, Brew expects Trump to attempt an escalation that’s now playing out before he feels he’s truly running out of options in a month or two.
“My sense is that things are going to get worse before they get better,” Brew said. The U.S. is intensifying its attacks, and Iran is targeting more energy infrastructure of its Gulf neighbors, including potentially the Saudi’s Red Sea traffic, he added.
Even another peace deal is unlikely to last, he said. “It’s not going to be fully resolved. We’re likely to see continued flareups, continued rounds of skirmishing and hostilities. I don’t expect anything more durable than an interim deal that allows traffic to resume somewhat.”
In the meantime, “We’re going to see more fireworks in the next two or three weeks before we see any kind of progress towards de-escalation or accommodation.”