Strait of Hormuz; A lever that has an expiration date

Iranian economy:

An important part of this chain can now be seen in the data. US consumer inflation increased by 0.4% in August, gasoline prices rose by 3.9% in just one month, the one-year inflation expectation of American households jumped from 4.0 to 4.6% in the University of Michigan survey, and the market raised the possibility of a 25 basis point increase in the Federal Reserve’s policy rate in the upcoming meeting to about 85%. Therefore, the question today is not only whether the Strait of Hormuz can affect the American economy. The more important question for the Iranian politician is how long this economic power has a positive net return for its owner.

The importance of the Strait of Hormuz should not be measured by the direct dependence of the US on Persian Gulf oil. America today is much less dependent on oil imports from the region than in the past few decades. In the first half of 2025, only about 0.4 million barrels per day of crude oil and condensate from the Persian Gulf countries entered the United States through the Strait of Hormuz, which is equivalent to about 2% of the consumption of oil products in this country. On the other hand, in the same period, about 20.9 million barrels of oil and products, equivalent to about one-fifth of the world’s consumption, passed through this strait and more than 20% of the global LNG trade was also dependent on it. America may have a limited physical dependence on the oil of the Strait of Hormuz; But it is not immune to the global price of energy, imported inflation and its financial consequences. Oil is priced in a global market, and the American consumer does not buy gasoline based on his country’s relative self-sufficiency.

The developments of recent days have made this vulnerability more obvious. The Saudi east-west pipeline, which used to transport 4-5 million barrels of oil to the Red Sea in recent months and was one of the most important ways to bypass the Strait of Hormuz, has been temporarily stopped after the recent attack. At the same time, developments in Prim Island and Bab Al Mandab have made the western route of oil transportation in the region more risky. The rental rate of very large oil tankers on the Oman Sea route to China has reached Worldscale 450, which is approximately equivalent to $11.5 per barrel. Therefore, the current shock can no longer be explained by the price of Brent alone. The world is simultaneously facing shocks to energy prices, freight rates, insurance and security of trade routes, and the disruption of a bottleneck is spreading to the routes it was supposed to replace.

The International Energy Agency also does not count on a quick return of the market to the normal situation. The organization now expects global oil supply to decrease by 5.7 million barrels per day in 2026, and the recovery of an important part of the normal flow of the Persian Gulf supply will be postponed to 2027. This means that the global market is not facing a temporary spike in oil prices for a few days, but the possibility of a multi-seasonal disruption in supply, transportation and inventories has increased.

This difference is decisive for the American monetary policy. The central bank usually does not react to a temporary increase in oil prices as much as a domestic demand shock; Because the increase in energy prices in the first stage both increases inflation and reduces the real income of the household. The problem changes when the initial shock is deposited in inflationary expectations, wages, and the pricing behavior of firms. The new data from the University of Michigan is important precisely for this reason. The one-year inflation expectation has increased from 4.0 to 4.6% and the long-term expectation has reached from 3.3 to 3.4% after three months of stability. At the same time, the consumer confidence index has decreased again and the University of Michigan has pointed to the return of pressure on fuel prices and the concern of households about more pressure on their budgets.

Thus, a more expensive barrel of oil doesn’t just increase the cost of fuel in the US. If the energy shock increases inflationary expectations and the reaction of the Federal Reserve, the dollar interest rate and the yield of treasury bonds will also increase. Then the effect of a disturbance in the Persian Gulf will be transferred to other parts of the world through the American financial system, in such a way that the cost of financing governments and companies will increase, the currencies of emerging economies will be under pressure, and other central banks will have less room to reduce interest rates. In such a situation, the Strait of Hormuz puts pressure on the world economy from two directions; It restricts supply and simultaneously weakens demand through tighter financial conditions. This is the combination that turns a supply shock into a deflationary problem.

But from this point, the analysis for Iran should be separated from the analysis of the world economy. The increase in global oil prices does not necessarily mean an improvement in Iran’s economic situation. For an exporter who can sell oil without restrictions, deliver it, receive the money from the sale, and spend the proceeds freely, an increase in the price of oil is considered an improvement in the exchange relationship. Iran in the current situation is far from all these assumptions. Estimates based on the tracking of tankers show that Iran’s crude oil loading has decreased from around 2 million barrels per day in March to around 220,000 to 255,000 barrels per day in August. Along with the decrease in volume, the increase in the cost of transportation, insurance, sales discount, mediation, settlement, and the difficulty of accessing foreign exchange resources increases the gap between the world price of oil and its real benefit for Iran’s economy.

Therefore, the appropriate variable for the decision of the Iranian policy maker is not the price of oil, but the usable net foreign exchange income per barrel. This index should start from the actual selling price and deduct from it the Iranian oil discount, additional transportation fare, insurance and risk cost, mediation and settlement cost, and the cost of limited access to resources. It is even better to include the possibility of collection and practical use of the resulting currency in the calculation. Brent may cross $100; But Iran’s usable net foreign exchange income for each barrel has decreased. In such a situation, the same shock that is negative for the global consumer will not necessarily be positive for the Iranian exporter.

This separation is very important for evaluating the strength of the domestic economy. In the April estimate, the International Monetary Fund predicted the real growth of Iran’s economy in 2026 to be negative 6.1% and the average inflation to be 68.9%. Although growth estimates may change in subsequent updates, the general direction of the message is clear. Iran’s economy did not enter this period with a large margin of confidence before the recent escalation of tension. The decrease in usable foreign currency income, the increase in import costs, the disruption in the supply of raw materials and intermediate goods, and the increase in uncertainty simultaneously put pressure on the supply and demand sides of the economy.

More importantly, war pressure in Iran is multi-layered. The increase in rent and insurance directly increases the cost of imports, the difficulty of accessing foreign currency limits the working capital of companies, the decrease in access to oil revenues puts pressure on the government budget, and if this pressure is finally financed by an increase in the monetary base or a sharp growth in liquidity, the external shock will turn into persistent domestic inflation. As a result, there is a fundamental asymmetry between America and Iran. America mainly bears the cost of the Strait of Hormuz through energy, household purchasing power and monetary policy; Meanwhile, in addition to these channels, Iran is also facing physical restrictions on trade, foreign exchange income, imports, and government and business financing.

This asymmetry does not mean that the continuation of the disturbance will immediately reduce the leverage of the Strait of Hormuz. By the way, the opposite may happen in the short term. As the disruption continues, commercial inventories will decrease, part of the strategic reserves will be consumed, the excess capacity of alternative routes and routes will become more limited, and the increase in fares and insurance will expand the scope of the shock. The damage to the east-west line of Saudi Arabia is a reminder that alternative routes have their own limited capacity and vulnerabilities. From this point of view, the first few weeks of the crisis may even increase the economic power of the Strait of Hormuz.

But time does not work the same way over a longer horizon. High prices and persistent uncertainty will encourage producers outside the Persian Gulf to increase supply, make investment in alternative infrastructure more justifiable, push consumers to conserve and change their energy mix, and push governments to reduce their dependence on a single bottleneck. Some of these adjustments are costly and time-consuming; But their direction is clear and predictable. On the other hand, for Iran, the cost of the crisis is accumulated from the first day in foreign exchange reserves, import capacity, working capital of companies, government budget and household purchasing power. Therefore, the cost curve of the two parties does not necessarily have the same shape. Iran’s leverage may increase initially; But with the prolongation of the crisis, the domestic cost will accumulate faster and the global economy will gradually activate its adjustment mechanisms.

Here, the concept of “the date of use of the Strait of Hormuz” has a more precise meaning. A geoeconomic leverage should not be measured only by the amount of damage it can inflict on the other party. For the policymaker, what matters is the net return on leverage. To put it simply, one should ask how much extra cost will be imposed on the other party by continuing the pressure for another day and what cost will it create for the domestic economy and how much new economic or political advantage will it add to the bargaining power of the country. As long as the marginal benefit of bargaining power exceeds the marginal internal cost, holding leverage can have a positive return. But if the cost of one more day of the crisis for the inside increases faster than the points that can be obtained from the outside, the same lever enters the depreciation stage.

This calculation is fundamentally different from the simple proposition that the greater the pressure, the greater the bargaining power. The economic power of a lever is not a function of its intensity, but it is a function of the intensity, time and relative tolerance of both sides. An action in the first days of the crisis may create a huge cost for the world economy and a manageable cost for Iran; But the same action after a few months, in an economy whose currency reserves, trade network and working capital are under pressure, will have a completely different cost-to-benefit ratio.

Therefore, Iran’s trump card at the current stage is not only the ability to cause more disruption. The increase in oil and fuel prices, the pressure on the US inflationary expectations, the sensitivity of the Federal Reserve’s decision and the vulnerability of alternative routes, all have increased the cost of the continuation of the crisis for the other party. But the true value of this situation is revealed when a part of this potential cost can be turned into a sustainable economic gain. The measure of success is not only the reduction of tension, but it should be seen what changes will be made in the stable possibility of oil export, the cost of shipping and insurance, the way of collection and use of export revenues, and the possibility of importing essential and intermediary goods. an agreement that only reduces the intensity of tension for a while; However, the main limitation of Iran’s foreign exchange and trade does not change, it has not actualized an important part of the economic value of the existing leverage.

At the same time, the domestic policy should also be adjusted with the logic of maintaining the economy’s capacity to continue the path. The goal of exchange rate policy should not be the unlimited defense of a specific number for the exchange rate; But leaving the market to random jumps is not compatible with managing the economy in emergency situations. Limited reserves should be used to prevent market disruption, supply critical commodities and raw materials, and maintain working capital for critical activities, not for long-term rate stabilization that is not supported by fundamentals. The difference between managing volatility and committing to a fixed price is very important in such situations.

The possible reaction of the Federal Reserve should not be mechanically extended to Iran’s economy. The Federal Reserve is facing an economy where the energy shock now poses a risk of transmission to expectations and general inflation, and where interest rate instruments operate through relatively well-known channels. In Iran, a significant part of war-induced inflation stems from currency restrictions, supply disruptions, increased trade costs, and government financial pressure. A rise in interest rates cannot bring oil tankers into the strait, lower insurance costs or open access to foreign exchange. The task of monetary policy in such a situation is to prevent the initial supply and currency shock from turning into a stable process of price increases, liquidity growth, and disruption of expectations.

From this point of view, perhaps one of the most important economic tasks of the government and the central bank in the coming weeks is to create a real dashboard of the capacity to withstand the crisis. The volume of nominal oil exports alone is not enough. Usable net foreign exchange income, daily cost of transportation and insurance, inventory of strategic goods, upcoming foreign exchange obligations, production import requirement, working capital status of vital industries and cash pressure of the government budget should be seen side by side. Without such a picture, the decision on how much pressure to bear may be too influenced by the price of oil or the daily developments of the currency market; Two variables that alone do not show the true picture of the situation.

Today, the tension in the Strait of Hormuz creates costs for the American and world economy far beyond the increase in the price of a few barrels of oil. When the disturbance in a strait in the south of Iran is transmitted in a short distance to the price of US gasoline, the inflation expectations of households and the possibility of changing the policy rate of the Federal Reserve, the geo-economic power of this bottleneck cannot be ignored. But this same power should not cause calculation error inside. The value of a lever is not the maximum damage it can cause, but the amount of sustainable benefit that can be gained from it before the lever itself wears out.

Therefore, the main issue for the policymaker is not how far Iran is able to increase the pressure. The more precise issue is at what point the net return of continued pressure reaches the maximum value and from where the internal cost increases faster than the points that can be earned. It is not easy to recognize this point; But not seeing it is more expensive. Strait of Hormuz is still one of the most important geo-economic assets of Iran. Therefore, the value of the policy is that this asset becomes a sustainable economic achievement when it is still expensive for the other party and bearable for Iran.

Dr. Hossein Tavaklian / Associate Professor of Faculty of Economics of Allameh Tabatabai University