Gulf oil shock: Limits of Trump’s plan to calm energy markets

As the third Gulf war enters its second week, the global oil market faces an unprecedented supply shock, and the world is closely watching the Strait of Hormuz. On March 9th, Donald Trump declared the conflict “pretty well complete,” claiming Iran’s military capacity was “wiped out” and that Operation Epic Fury would end “very soon.” He added that the US would escort vessels through the blocked strait if needed and offer political-risk insurance to tankers, while warning Iran to “stop holding global energy markets to ransom or Uncle Sam will bomb your power plants and other ‘important targets.’”

Markets initially responded to these mixed signals with relief: Brent crude fell 8% on March 10th to $91 a barrel. Yet, as The Economist points out in its analysis, nervousness persists outside trading floors, not least because Trump cannot single-handedly end hostilities.

Saudi Aramco’s boss has warned of “catastrophic consequences” if the war drags on, and the International Energy Agency (IEA) has convened twice this week to discuss emergency measures.

The closure of Hormuz represents the most sudden shock to global petroleum supply in history. Last year, some 14 million barrels per day (b/d) of crude—14% of world output—plus another 4 million b/d of refined products passed through the strait. While some oil can be rerouted via pipelines in Saudi Arabia and the UAE, roughly 15 million b/d remains trapped in the Gulf. Governments have three main levers to mitigate the shortage: increase traffic through Hormuz, release strategic reserves, or boost crude exports from other sources—but each carries limitations.

The most immediate solution—moving more tankers through Hormuz—faces logistical and security hurdles. The Economist noted that America’s International Development Finance Corporation (DFC) earmarked $20 billion to insure vessels exiting the Gulf, though coverage gaps remain. JPMorgan Chase estimates full coverage would cost $352 billion, far exceeding DFC limits. War-risk insurance is available, but premiums have surged to 1-2% of vessel value, while shipowners fear Iran’s attacks more than the cost of insurance.

Military escorts could in principle restore traffic, but historical precedents highlight limitations. During the 1987–88 Iraq-Iran war, U.S.-escorted convoys averaged one per week, far below the 50 tankers per day needed to match prewar traffic. As The Economist observes, even a large-scale escort armada would be slow to return oil to market and would itself be a target, with potential for catastrophic oil spills.

Releasing strategic reserves is a surer—but still constrained—option. IEA member nations collectively hold 1.2 billion barrels, with another 600 million barrels in industry inventories. However, drawdowns are gradual, limited by pipeline capacity and minimum storage requirements, allowing at most 3 million b/d of additional supply. Alternative crude from Russia or U.S. shale could help, but logistical, political, and capacity constraints cap relief at around 4 million b/d—less than a third of the Hormuz shortfall.

Meanwhile, Gulf producers are already trimming output as storage fills. Within three weeks, combined cuts could approach 10 million b/d, potentially pushing Brent to $150 per barrel.

Protectionist measures are emerging: China has suspended diesel and petrol exports, and India may follow. The Economist concludes that the world now watches the Strait of Hormuz with bated breath, as the options to stabilise energy markets remain limited and fraught with risk.

By Sabina Mammadli