Quagmire of the Vanities

Yesterday Donald Trump declared that the Iran war is going “better than anybody expected could be done.” He’s delusional, of course. And his delusions are the reason the price of oil is back at around $100 a barrel, and — as I’ll explain shortly — the effective price is much higher than that.

Trump’s gratuitous war on Iran has turned into a remarkable quagmire — remarkable because the only thing keeping the war going is Trump’s vanity. He effectively lost the war in the first few days, when it became apparent that Iran’s hardline regime had survived the initial decapitation strike and that the U.S. military couldn’t keep the Strait of Hormuz open. But Trump is psychologically incapable of admitting failure. So the war goes on, weakening America by the day, as he searches for some way to spin his abject defeat as a victory.

And declarations that the economic fallout from the war had been contained now look dangerously premature.

It’s true that during the first closure of the Strait oil prices didn’t rise as high as many analysts — myself to some extent included — expected. Some Persian Gulf oil made its way to markets bypassing the Strait of Hormuz, notably via the Saudi pipeline to the Red Sea. China sharply reduced its oil imports. And the world offset a substantial part of the shortfall in supply by drawing down inventories.

The second Hormuz closure could be worse, for several reasons. Iran’s Houthi allies are now attacking shipping in the Red Sea, threatening that safety valve. Also, inventories are now much lower than they were when the conflict began, and can’t serve as a cushion going forward.

Perhaps the most important thing to realize about the current situation, however, is that oil is more expensive than it looks.

Nobody burns crude oil. Oil must be refined into usable fuels, mainly gasoline and diesel. And there’s a global shortage of refining capacity. This partly reflects the war in Iran, but it also reflects Ukraine’s stunningly effective campa…