Losing the Iran War: The Economic Front

It won’t look like this

So here, according to Trump and his officials, is the state of the war with Iran: Iran has been totally defeated and is desperate for a deal — indeed, Trump has announced that a deal is imminent on at least six distinct occasions. Also, because there is no deal, and Iran is intransigent, Scott Bessent, the Treasury secretary, is preparing what he calls an “economic D-Day,” economic sanctions that will bring the Iranian regime to its knees — a tricky proposition since, according to those same officials, Iran is already on its knees. But whatever.

What you need to know is that this economic campaign will fail as thoroughly as the military campaign.

The U.S. plan, or maybe just a concept of a plan, appears to be “Blockade me? No, blockade you!”

On one side, the U.S. is trying to restore the flow of oil through the Strait of Hormuz despite Iranian threats. At least some tankers are running the strait “dark,” with their transponders off. Private insurers won’t cover the risks of these runs, so the U.S. government is providing insurance instead. And U.S. military forces are providing some protection against Iranian drones and missiles.

This part of the plan is, dare I say it, not entirely stupid. Clearly at least some oil is making it out. The Trump administration says 8 million barrels a day, which would be a significant amount if true. Unfortunately, that figure is coming from Trump officials, who have zero credibility, so it’s anyone’s guess how big the number really is.

More important, however, is the fact that even a successful re-opening of the Strait of Hormuz matters a lot less now than it would have a few months ago. There are two main reasons ending Iran’s blockade of the Strait, even if possible, will be ineffective.

First is the sheer scale of the U.S. military failure in the Persian Gulf. Not only did U.S. attacks on Iran fail to overthrow the regime, Iranian attacks have forced the U.S. to abandon many of its bases in the region. The loss of these bases, combined with the depletion of U.S. stocks of interceptors and other munitions, means that America is effectively unable to defend its Gulf allies.

So what will happen if Iran feels that its blockade of Hormuz isn’t doing enough damage? It can and will escalate to attacks on oil facilities all around the region. And there’s very little America could do to stop it.

Second, energy prices to final users have become increasingly disconnected from the price of crude oil. Remember, people don’t burn crude, they burn gasoline and diesel. And the prices of these refined products are up much more than crude prices. The chart below shows the price of Brent crude along with the wholesale price of diesel fuel and a weighted average of the wholesale prices of diesel and gasoline:

The huge premium in the prices of refined products over the price of crude — the “crack spread” — is a result of a global shortage of refining capacity (partly caused by Ukrainian attacks on Russian refineries.) So even if Bessent can get more oil flowing through Hormuz and drive down crude prices, the economic pain that Americans are suffering at the gas pump will remain high.

What about Bessent’s threat to isolate Iran economically, cutting off both its exports and imports? There’s a one-word rejoinder: China. As I wrote a few weeks ago, China has been the winner from Trump’s war.

Now it’s true that the U.S. Navy can and has mostly blocked Iranian oil exports, although maintaining this blockade is harder than it may seem. After all, we know that the Navy is under severe strain, literally having trouble keeping sailors fed and the plumbing on their ships working. These difficulties, in turn, stem largely from the loss of U.S. bases, especially the base in Bahrain. Still, this means that Iran is losing its main source of export revenue. In 2025, that revenue amounted to about $45 billion.

That is a lot of money from Iran’s point of view — around 7 percent of the country’s 2025 GDP. It is, however, only about 0.2 percent of China’s GDP.

Why is China relevant? Well, because the Chinese are obviously enjoying great geopolitical benefits from Trump’s self-inflicted quagmire in Iran. And it would cost them very little, from their point of view, to keep us stuck in the quagmire by supplying the Iranian regime with enough money to finance purchases of essential imports.

Can’t the U.S. blockade Iranian imports too? No. Lucian Truscott has a very good article explaining how fundamentally impossible it would be for the US to close the many, many routes through which goods can get into Iran.

In his remarks yesterday, Bessent made grandiose claims to the effect that we can isolate Iran by imposing sanctions on countries and companies that deal with the Iranian regime. But the Trump administration has already imposed tariffs and other sanctions on so many countries, for so many alleged purposes, and backtracked so many times, that its credibility is exhausted. Moreover, Iran can get much of what it needs from China. So do you really believe that a weakened U.S. can coerce China into helping it defeat Iran? And against China’s own strategic interests? If you believe that I have a few 30-year bonds to sell you.

Yes, the United States still has the capability to impose substantial economic hardship on Iran. But it’s just another Trump fantasy to believe that he can intimidate a regime that has already survived decapitation of most of its leadership, enduredmonths of intense bombing, and that has successfully retaliated against U.S. allies in the Gulf.

While Scott Bessent is a contemptible sycophant, he isn’t stupid. He surely knows that this pathetic attempt to pressure Iran will not only not work but also reeks of desperation. And the erstwhile bond trader in him will know what happens when those who really have the goods – China, in this case – smell the scent of desperation. I can safely predict that the Chinese will make sure that the Iranian regime survives, and that they will thoroughly enjoy watching Trump slowly twist in the wind over the Strait of Hormuz.

NONMUSICAL CODA

What a real D-Day looked like