New York: How high will price of crude oil rise? The answer depends on another question: how long will the US-Israel war against Iran last? And the answer to this second question depends on a third question: how long can Donald Trump continue the war without worrying about its repercussions on the forthcoming mid-term elections?
The longer the conflict continues, the tighter the global supply of oil and gas will become, and the higher prices will climb, and the greater would become Trump's chances of losing the House, or Senate to Democrats in the mid-terms.
In the first three weeks of the war, crude prices have already risen by roughly 50% from their pre-war levels. That's a sharp increase, but still modest compared with earlier oil shocks in West Asia.
During the first oil crisis in October 1973, when Opec imposed an embargo on countries that supported Israel during the Yom Kippur War, crude prices quadrupled. The second oil shock followed the 1979 Iranian Revolution, when oil prices surged roughly two-and-a-half times. Disruption in oil supplies after Saddam Hussein's 1991 invasion of Kuwait nearly doubled the price of crude.
History suggests that oil prices could rise far beyond what we have seen so far. Risk of natural gas price increase is much higher, because it's more difficult to store and transport. Goldman Sachs analysts have projected that if LNG flows through the Strait of Hormuz are completely halted for a month, Dutch natural gas, or TTF (Title Transfer Facility), could approach €74/MWh, an increase of 136%. If the disruption lasts 2 mths, European natural gas prices could rise to more than €100/MWh.
Ironically, perhaps the only thing that can push Trump to end the war is price of gas and oil. Having launched the war, he faces enormous pressure to continue it until he can claim a clear victory - either by dismantling Iran's capacity to build a nuclear weapon or by engineering regime change in Tehran. The latter goal appears unrealistic.
Achieving the former would likely require several more weeks, if not months, of sustained military operations. So, Trump finds himself fighting the war while watching two indicators closely: global oil price, and performance of the US stock market.
As long as Iran constricts the Strait of Hormuz, which carries about one-fifth of the world's oil, higher oil and gas prices are inevitable. What is truly striking is that Washington did not foresee this most predictable retaliation. Did the US think it can bomb the hell out of Iran, and Iran would do nothing in response?
Trump has repeatedly argued that higher oil prices benefit the US because the country is now a net exporter of energy. That claim is partly true. Yet, oil prices are set in the global market. A disruption in supply anywhere in the world pushes prices up everywhere, including at US gas stations.
If current market forecasts prove correct, the political cost of rising energy prices could quickly outweigh the strategic gains of continuing the war. In that case, Trump may find it difficult to sustain the conflict for more than a few weeks.
US voters are acutely sensitive to gasoline prices. Trump won his second term in part by promising to bring inflation under control. Since the war began, gas prices in the US increased by roughly 20%, and diesel prices by about 37%. Higher diesel prices ripple through the entire economy, especially the food supply chain, because fruit, vegetables and other goods must be transported long distances. Rising transportation costs inevitably translate into higher food prices for consumers.
Trump has 'demanded' other countries to come forward in protecting vessels in the Strait of Hormuz. So far, US allies he had earlier rebuffed through Trump tariffs and jibes against Nato members have stayed away. As expected, Trump is quite unhappy with this raft of refusals. He has threatened that Nato faced 'a very bad future'.
The US may be able to wage the war militarily. But it may struggle to sustain it politically - both abroad and at home. If oil prices continue their upward march, and American voters begin to feel the pain at pumps and grocery stores, pressure on the White House will intensify.
In the end, the trajectory of the war may be determined less by events on the battlefield than by numbers flashing on gas station signs across the US.
(The writer is professor of social policy, Columbia University, US)
The longer the conflict continues, the tighter the global supply of oil and gas will become, and the higher prices will climb, and the greater would become Trump's chances of losing the House, or Senate to Democrats in the mid-terms.
In the first three weeks of the war, crude prices have already risen by roughly 50% from their pre-war levels. That's a sharp increase, but still modest compared with earlier oil shocks in West Asia.
During the first oil crisis in October 1973, when Opec imposed an embargo on countries that supported Israel during the Yom Kippur War, crude prices quadrupled. The second oil shock followed the 1979 Iranian Revolution, when oil prices surged roughly two-and-a-half times. Disruption in oil supplies after Saddam Hussein's 1991 invasion of Kuwait nearly doubled the price of crude.
History suggests that oil prices could rise far beyond what we have seen so far. Risk of natural gas price increase is much higher, because it's more difficult to store and transport. Goldman Sachs analysts have projected that if LNG flows through the Strait of Hormuz are completely halted for a month, Dutch natural gas, or TTF (Title Transfer Facility), could approach €74/MWh, an increase of 136%. If the disruption lasts 2 mths, European natural gas prices could rise to more than €100/MWh.
Ironically, perhaps the only thing that can push Trump to end the war is price of gas and oil. Having launched the war, he faces enormous pressure to continue it until he can claim a clear victory - either by dismantling Iran's capacity to build a nuclear weapon or by engineering regime change in Tehran. The latter goal appears unrealistic.
Achieving the former would likely require several more weeks, if not months, of sustained military operations. So, Trump finds himself fighting the war while watching two indicators closely: global oil price, and performance of the US stock market.
As long as Iran constricts the Strait of Hormuz, which carries about one-fifth of the world's oil, higher oil and gas prices are inevitable. What is truly striking is that Washington did not foresee this most predictable retaliation. Did the US think it can bomb the hell out of Iran, and Iran would do nothing in response?
Trump has repeatedly argued that higher oil prices benefit the US because the country is now a net exporter of energy. That claim is partly true. Yet, oil prices are set in the global market. A disruption in supply anywhere in the world pushes prices up everywhere, including at US gas stations.
If current market forecasts prove correct, the political cost of rising energy prices could quickly outweigh the strategic gains of continuing the war. In that case, Trump may find it difficult to sustain the conflict for more than a few weeks.
US voters are acutely sensitive to gasoline prices. Trump won his second term in part by promising to bring inflation under control. Since the war began, gas prices in the US increased by roughly 20%, and diesel prices by about 37%. Higher diesel prices ripple through the entire economy, especially the food supply chain, because fruit, vegetables and other goods must be transported long distances. Rising transportation costs inevitably translate into higher food prices for consumers.
Trump has 'demanded' other countries to come forward in protecting vessels in the Strait of Hormuz. So far, US allies he had earlier rebuffed through Trump tariffs and jibes against Nato members have stayed away. As expected, Trump is quite unhappy with this raft of refusals. He has threatened that Nato faced 'a very bad future'.
The US may be able to wage the war militarily. But it may struggle to sustain it politically - both abroad and at home. If oil prices continue their upward march, and American voters begin to feel the pain at pumps and grocery stores, pressure on the White House will intensify.
In the end, the trajectory of the war may be determined less by events on the battlefield than by numbers flashing on gas station signs across the US.
(The writer is professor of social policy, Columbia University, US)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
Neeraj Kaushal
Professor, Social Policy, Columbia University, US