Oil Markets Tread Thin Line Between Toll Collection and Blockade
The recent escalation in tensions between Iran and the United States has raised concerns about the stability of global energy markets. The Gulf ceasefire lasted only three weeks before Iranian attacks on commercial ships led to a US strike, revocation of Iran's oil-sanctions waiver, and declaration that the memorandum of understanding was 'over'.
Notably, despite this escalation, Brent crude prices rose to around $79 per barrel, but remain below April's peak of $120 when the strait was closed outright. This modest price increase raises questions about whether the renewed war will lead to a full-blown blockade or a violent renegotiation of passage terms.
The severity of the underlying shock is evident: lost oil output has already exceeded that of the 1973-74 OPEC embargo, and when liquefied natural gas, fertilizer inputs, and freight are included, the global energy bill is at least twice the crude price quoted on trading screens.
Two possible scenarios emerge from this conflict. Iran may be seeking full control of the strait, leading to a larger conflict and another blockade with soaring oil prices. Alternatively, it could be behaving like a toll collector, maximizing revenue while keeping the risk premium alive without choking off traffic, resulting in elevated but broadly capped energy prices.
The current situation suggests that Iran is acting more like a toll collector. The US has avoided targeting Iran's energy infrastructure, and Iranian attacks on shipping have been sporadic rather than systematic. Additionally, Iran's parliament has debated tolls on 'hostile' shipping, and the MOU itself envisioned Iran's help managing strait traffic.
For central banks, these two scenarios lead to different policy responses. If Iran is collecting tolls, elevated but broadly capped energy prices act like a chronic tax, which is less of an issue for monetary-policy tightening. However, if Iran is seeking full control of the strait, central banks will need to act forcefully to prevent the shock from becoming embedded inflation.
Markets are highly sensitive to oil price movements due to this uncertainty. Investors are toggling between two regimes, and each jump in oil poses the same question: Is this a move from toll collection to blockade?