The Peace Trade is a Trap

The price of oil has dropped sharply over the past few weeks.

Traders are once again betting the war will end soon. This is a dangerous assumption.

We’ve written from the beginning of the war that it would not be over quickly and the U.S. would struggle to win in the end, despite being able to inflict enormous damage on Iran and its economy. That forecast has proved highly accurate.

Viewed from Iran’s perspective, there has been no regime change. Iran still retains a substantial stockpile of highly enriched uranium and the regime continues to resist U.S. attacks.

It is true that scores of top Iranian religious, military and political figures have been killed. The result is personnel change, but that’s not regime change. The Iranian Revolutionary Guard Corps (IRGC), with a figurehead ayatollah, is still in charge.

Trump has claimed over and over that the war would be done “in a few days” or “a few weeks,” but those claims proved hollow, and Trump’s credibility on the issue is dropping.

There was a “ceasefire” last April, a “Memorandum of Understanding” last June and a string of negotiations, but none of it lasted.

There are negotiations currently underway through Qatar between Iran and the U.S., but the sides are still far apart. I don’t expect that to change. Both sides are playing for time to rest, rearm and prepare to resume the fighting.

There’s a relative lull in the fighting right now, but both sides know that’s just a breather. Major military action will likely resume in a few days, now that the midterm elections are over in the U.S. and parliamentary elections are over in Israel.

An Unwinnable War

U.S. failure to win the war does not mean Iran has achieved a major victory.

Iran can’t win the war except in the sense of the regime hanging on and continuing to block the Strait of Hormuz. The U.S. can’t win either — bombing blows things up but won’t win the war by itself.

The U.S. won’t agree to Iran’s terms involving reparations and withdrawal from the Middle East.

Iran also insists that it will control the Strait of Hormuz going forward, with vessels seeking transit subject to Iranian permission and restrictions. Iran has also sought to impose transit fees based on vessel size and cargo, while reserving the right to waive those fees at its discretion, obviously beginning with its own oil export cargoes.

The U.S. will not agree to any of this.

Iran won’t agree to U.S. terms, including the elimination of its nuclear enrichment facilities and surrender of its highly enriched uranium stockpiles.

The U.S. also wants an end to Iranian support for Hezbollah in Lebanon, the Houthis in Yemen at the entrance to the Red Sea and Hamas in Gaza. Iran will never agree to these terms.

Iran depends on the so-called Shia Crescent that runs from the Strait of Hormuz through Tehran, Iraq, Syria and Lebanon to exert regional influence and keep Israel continually on the defensive.

With neither side coming close to agreeing to the other side’s terms, this war will drag on with no end in sight.

The War’s Economic Kill Chain

Of course, the impact of this war goes far beyond the battlespace.

Prices for oil, liquefied natural gas, nitrates, sulfur and distillate products such as gasoline, diesel and kerosene (jet fuel) have risen sharply. This has led to inflation not only in energy costs and home heating but in a large variety of consumer goods.

Everything you buy moves by truck, either to your door, a distribution center or a store. When the cost of diesel to move trucks goes up, the cost of everything on the truck goes up with it.

This dynamic will not change soon.

Matters will soon get worse. Sovereign petroleum reserves, natural gas reserves, fertilizer and chemical stockpiles have all been drawn down over the past eight months since the war began.

Those stockpiles are one reason prices have not gone even higher and shortages have not been more severe. That grace period based on reserves is running out. Many stockpiles are depleted, and further shortages and price spikes may not be far behind.

This supply disruption will play out in inflation, which in turn could drive interest rates higher.

Those higher interest rates affect mortgages, credit cards and other forms of consumer debt. They also add to the cost of servicing the national debt as the U.S. Treasury has to refinance maturing debt at progressively higher rates.

Even the AI infrastructure boom will slow as hyperscalers face higher interest rates on the enormous borrowings and financing commitments they are undertaking to pay for new data center construction.

The process feeds on itself, with supply shortages, higher costs, higher interest rates, slowing investment and ultimately a market crash and recession.

But before the crash and recession, investors will have to endure inflation. The bad news comes in stages, but it’s almost all bad news because of a war that never should have started.

Iran’s Next Targets: Oil, Power and Water

Iran is another “forever war” and looks more and more like Vietnam as the months drag on.

The regime continues to strike oil tankers in the Strait of Hormuz with anti-ship missiles and drones. Over the weekend, at least two full tankers of oil were on fire in the U.S.-controlled southern route.

Via Maritime Executive

If the war restarts at full scale, the Iranian battle plans have been well advertised. When the U.S. begins its new attack, they will not remain passive.

Iran still has a substantial arsenal of missiles and drones. Iranian officials have threatened attacks across the Persian Gulf, warning that nothing is off limits.

That means Iran could attack pipelines, refineries, oil fields, electricity-generating stations, ports and desalination plants.

This presages a humanitarian crisis as Gulf populations dependent on desalination could face severe water shortages within days if critical facilities are disabled.

The news (really propaganda) will be filled with election stories for weeks to come. But Congress will be as dysfunctional as ever, even with new faces in place.

The real story is what’s going on in Iran.

Get ready for more fireworks and higher prices for gas, diesel and everything else as far as the eye can see.