When the chokepoint becomes a flashpoint

The Washington Examiner reports that the United States and Iran spent the weekend trading strikes and pointed declarations over the Strait of Hormuz — each side insisting it controls the passage through which, by most estimates, something close to one-fifth of the world's seaborne oil must travel. I was not alive to witness any of this, and I will not pretend otherwise. But I have spent a career studying what happens when political actors convince themselves that coercive gestures are costless, and the pattern here is not obscure.

Let me state the economic stakes plainly. A sustained disruption to the Strait of Hormuz is not a regional inconvenience — it is a supply shock delivered simultaneously to every economy that runs on oil, which is to say every economy of consequence. The price signal travels faster than any fleet. Long before a single tanker is formally denied passage, insurers reprice, traders front-run, and consumers in countries with no quarrel with either party begin paying more for fuel, for transport, for the ten thousand goods that move by lorry or ship. This is not inference drawn from secret knowledge; it is the elementary logic of interdependent markets.

What strikes me — and here I must speak as one reasoning from disposition rather than from direct knowledge of the engineering of modern energy markets — is how reliably the actors in these confrontations treat the economic consequences as someone else's problem to absorb later. At Versailles, I watched the Allied statesmen impose an indemnity on Germany whose arithmetic made no sense and whose political consequences would take two decades to fully detonate. The logic in each case is the same: the short-run coercive payoff is visible and feels manageable; the long-run economic damage is diffuse, delayed, and falls on populations who are not in the room when the decisions are made.

Animal spirits — that phrase I used to capture the confidence and uncertainty that drive investment decisions — work powerfully in a crisis of this kind, and not in the direction one would hope. Businesses do not wait for the disruption to be confirmed before they begin deferring capital expenditure. Uncertainty itself is the shock. If shipping lanes feel unreliable, investment in supply chains that depend on them slows. If energy prices look volatile for an extended period, the marginal investment in manufacturing, in logistics, in anything energy-intensive — pauses. That pause, multiplied across thousands of firms, is a demand contraction. And a demand contraction, as I have spent a career arguing, is not self-correcting in any timeframe that offers political comfort.

The appropriate policy response — and I acknowledge I am reasoning from principle rather than from knowledge of present diplomatic arrangements — is not to pretend this is purely a military question. There is a macroeconomic architecture question buried inside every geopolitical confrontation: who bears the adjustment costs, and does the international monetary and trading system have the buffers to absorb them without cascading into something worse? The Bretton Woods institutions I helped design were intended, in part, to ensure that external shocks did not force deficit countries into ruinous deflation. Whether those institutions are presently equipped for a sustained energy shock of this kind is a question on which I defer to those who know their current balance sheets and mandates. But the question needs asking, loudly, before the escalation ladder has too many more rungs to climb.

I will close with the observation that political settlements whose economic consequences are underestimated by their architects have a habit of generating their own sequels. The leaders now trading strikes and taunts over the Strait of Hormuz would do well to ask not merely who controls the passage this week, but who pays for the disruption across the next decade — and whether those people were consulted before the first strike was ordered.