The war is on hold. But the economy is still in danger.

For months, America’s war with Iran has been slowly suffocating the global economy. 

In March, Iran closed the Strait of Hormuz — the narrow waterway that links the Persian Gulf’s oil reserves to global markets. As a result, energy prices steadily rose while stock markets and growth forecasts fell. Analysts started warning that, if the Strait did not reopen soon, the global economy could slide into a deep recession.

And then, Tuesday night, these storm clouds scattered: The US and Iran reached an agreement on a ceasefire, one that would ostensibly pause American attacks on the Islamic Republic, in exchange for a resumption of transit in the Strait.

Oil prices swiftly fell by as much as 20 percent, while the Dow jumped more than 1,000 points.

And yet, some fear that Wall Street’s mood has brightened faster than geopolitical reality. Israel continued attacking Iranian proxies in Lebanon on Wednesday, in alleged defiance of the ceasefire agreement. Iran, meanwhile, kept the Strait shuttered, accused the US of violating the terms of their understanding, and declared negotiations with America “unreasonable.”

To get a clearer picture of what all this means, I spoke with the oil market expert Rory Johnston on Wednesday. Author of the popular newsletter, Commodity Context, Johnston has long argued that investors are underpricing the risks of the US-Iran conflict.

We spoke about why time may be on Iran’s side in a war of attrition, what a postwar global economy could look like, and how US consumers will fare in the most optimistic — and pessimistic — scenarios. Our conversation has been edited for clarity and concision. 

Now that there has been a ceasefire — sort of — what do you think is the most likely scenario for this war, the Strait of Hormuz, and oil markets going forward? 

I think we’ve taken a step in the right direction. But there are many unresolved questions. As of Wednesday afternoon, it does not appear that there has been any resumption of flow through the Strait. And in fact, we’ve seen many, many, many explosions and attacks continue during the ceasefire. 

My core assumption about this crisis was always that [President Donald] Trump was the actor most likely to cave — he is the one most sensitive to external market pressures. Given that, the most likely course of the war was that Trump would, eventually, unilaterally de-escalate. And Iran would retain quasi-control of the Strait of Hormuz. 

And that seems to be the situation that we are trending toward, which — while problematic — is much better than the doomsday scenario.

But Iran has stressed that it is only allowing a limited number of ships through the Strait and that the waterway will remain under control of the Iranian Revolutionary Guard Corps. We had accounts last night that Iran would only be allowing 10 to 15 ships through a day. If true, then that wouldn’t be much of a change from the status quo.

But would that be temporary? If the ceasefire leads to an actual peace agreement — which allows Iran to collect tolls on ships in the Strait — wouldn’t Tehran want a lot of traffic to move through that waterway?

Yeah. If the US Navy withdrew — and the bombing stopped and Iran felt safe and secure — then it would have an interest in resuming a moderate level of flow.

The issue is: Trump has been saying, “Let’s negotiate. And while you’re negotiating, just do us a favor and reopen the Strait, so that the global economy doesn’t crash while we’re talking.” But that’s basically asking Iran to forfeit its main source of leverage. Iran has its foot on the aorta of the global hydrocarbon market. It’s probably not going to step off before securing a more durable agreement.

So, the question is: Can the negotiations that begin Friday lead to such an agreement? And I think that’s the trillion-dollar question right now. 

Let’s say we do get a peace deal, in relatively short order. In the most realistic version of that scenario, what can Americans expect to experience economically? What happens to the prices of gasoline, travel, and other energy-related commodities?

If this holds up, then we’re going to avoid the scenario where America’s average gallon of gas costs $6. But even if everything goes perfect from here, the world will still be operating with about half a billion fewer barrels of oil than it would have had, were it not for this war.

And that’s because the Gulf states had to ramp down oil production — since, without the Strait, they had no way to transport or store all of that crude.

Right. And even if flow through the Strait resumes today, it’s going to take weeks to months for them to get that production back to pre-war levels. 

What would that mean for products that are downstream from fossil fuels — jet fuel, plastics, semiconductors, etc.? Would it take longer for the prices of those things to normalize? 

Yeah. For one thing, there haven’t been many confirmed attacks against oil fields or oil processing facilities in the Gulf. But there have been attacks on refining assets and petrochemical facilities. So productive capacity is down.

At the beginning of the year, a barrel of diesel was $30 more than a barrel of crude oil. As of right now, it’s nearly $70 more. But that’s down from a high watermark in late March of about $90 a barrel. So, the prices of both crude and products have come down. But markets for the latter remain very tight. And they will likely remain tighter relative to crude going forward.  

Let’s talk about the more pessimistic scenario. At this point, what’s the most plausible, worst-case outcome? What are you worried about?

The most obvious answer is that we get to Friday, no one can agree, and then we’re back in the same place as we were before the ceasefire.

Of course, we now know that there’s some appetite from the White House for an agreement. We can see that they’re responsive to market pressure. But Iran can see that too.

From Tehran’s strategic point of view, they have an interest in dragging this out.

So, let’s say that Iran decides that time is on their side and feels no rush to back off its most audacious demands. If the Strait remains effectively closed for another two months, what would that mean for US consumers?

By that stage, I think we will see things like $200-a-barrel crude. And that’s assuming that there is no escalation in tit-for-tat attacks on Gulf energy infrastructure. 

But if we just get pre-ceasefire conditions continuing until June, we’ll be in a situation where prices will need to rise until they force demand destruction.

In other words, prices will need to be so high that consumers have no choice but to use less energy. 

Right. Let’s say we have a 10-million-barrel-a-day deficit in the market. There’s no way that supply can react fast enough to fill that hole. So, to stop the global oil market from basically cannibalizing itself — and drawing inventories down to zero — you’ll need to ramp up prices until people just stop consuming. 

In Western countries, that will manifest as extremely high prices. But people will manage. In the developing world and the Global South, that will manifest as outright shortages. Ultimately, you would need a large drop in consumption. If that doesn’t happen in the West, then it will happen in poor countries.

And the same will happen with diesel and jet fuel.  

How much would America’s status as an energy exporter protect us in that scenario? After all, high oil prices are good for oil producers. So America’s terms of trade would improve: The stuff we export would become more valuable, relative to the stuff we import. And oil-rich regions of the country would presumably reap some benefit. 

Separately, we’re less reliant on the Gulf’s energy supplies than Europe or Asia. So, might those factors save us, if this ceasefire falls apart?

The United States — and North America, more broadly — remains the most energy secure area in the world. We likely won’t see shortages here, although we will feel the price pressure. 

So yes, that will benefit America’s terms of trade in a way. But the distributional effects will be extreme. You could see a boom in Texas and New Mexico, for example. But it will hit consumers across the entire United States. And it will hit them much harder on the coasts because you have more trade exposure there than mid-continent. 

More fundamentally, at the end of the day, if prices continue to spiral upwards, and we do have shortages throughout the Global South, that is a world of deep, deep recession. Much of the planet would probably be in an economic depression. 

No matter how energy-secure the United States is, it is still part of a global economy. And it will ultimately feel the economic ramifications of that economy downshifting in all sorts of ways. This would not be good for the median voter, by any means. It would feel like a massive tax increase. Markets would tumble. The world would simply be forced to consume less than it did before this war began.