Another Iran Deal Will Come Along. Why It Might Not Matter Much.

Ships are anchored in the Strait of Hormuz off the coast of Bandar Abbas, Iran. Oman and Iran have participated this month in technical discussions on reopening the strait. (Ali Saeedi/Getty Images)

It keeps feeling like Groundhog Day. A Truth Social post insists the Strait of Hormuz is opening, Brent crude oil prices fall, nothing happens, oil prices rise. The wait continues.

The oil market’s reaction to even the slightest hint of progress on negotiations to fully open the strait suggests that investors are attaching too much significance to what a diplomatic understanding between the U.S. and Iran can actually accomplish. Regardless of the details of any deal, large shares of the world’s oil, gas, helium, aluminum, and fertilizers will remain at risk.

President Donald Trump, of course, wants to get out of this quagmire as fast as possible with something that still looks like success—if you tilt your head and squint. The U.S. is running low on advanced munitions, and it isn’t clear that more bombing will unlock significant Iranian concessions. Perhaps more relevant for Trump’s allies, midterm elections are approaching. They understand that the war is roughly as unpopular as the high gasoline prices it has caused.

Washington, consumers, and markets alike will welcome reports of an actual agreement getting inked and satellite proof that traffic is flowing once again through the strait. Not only will prices of key commodities drop, but the world’s central bankers will have an excuse to delay any rate hikes they may be contemplating.

A narrow understanding to reopen the flow of shipping will be happy news—but only for a little while.

A quick look at a map shows why. Whatever rules are agreed for passage will be entirely determined by Iran and Oman, both of which border the strait and have been engaged in the most recent round of talks. Even if they don’t establish formal tolls, few shipping companies will refuse a quiet request to wire a million dollars to an Iranian Revolutionary Guard Corps’ account to ensure the safety of cargo worth at least a hundred times more. The U.S. can only tolerate that racket for so long.

At the same time, there are signs that Iran’s hard-liners are gaining power. While there is little visibility into the Iranian leadership, the supreme leader’s appointment of a new batch of top officials this week suggests the government is resolute as ever to resist Washington’s demands. Deal or no deal on the strait reopening, these hard-liners will insist on having the option to develop nuclear weapons and will argue that having more active regional proxies can help keep Israel and the U.S. off balance.

This means that any agreement on the strait will be little more than a Band-Aid on a much deeper wound. Sooner or later, Trump will be making fresh threats of civilization-ending military attacks. Iran will respond with renewed talk of closing the strait. A couple of missiles will fly in both directions, and the price of everything from oil to helium will ramp up all over again.

Behind these sharp moves in public markets, of course, there are structural shifts under way in the supply and demand for crucial seaborne Gulf exports. No one ever wants to depend so heavily again on what we have long known to be fragile regional stability. New pipelines are under construction, alternative suppliers are expanding production, and vast oil reserves from the U.S., Japan, and China are helping cushion the transition.

Over time, these fundamental shifts in production and consumption will establish a new equilibrium for prices across these vital global goods. For now, whatever price relief may come from an agreement—if one emerges—won’t last long.

Guest commentaries like this one are written by authors outside the Barron’s newsroom. They reflect the perspective and opinions of the authors. Submit feedback and commentary pitches to ideas@barrons.com.

Christopher Smart is managing partner of the Arbroath Group, an investment strategy consultancy, and was a senior economic policy advisor in the Obama administration.

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