For the first six months, the military conflict between the United States, its allies, and Iran remained a disruptive yet deceptively manageable affair. While the Strait of Hormuz was effectively choked off to maritime traffic—halting a transit corridor responsible for roughly 20 percent of the world’s liquefied natural gas (LNG) trade and an even larger share of global oil shipments—the international community managed to absorb the blow. Global energy prices ticked upward, and pockets of the world faced acute gas and oil shortages, but nations quickly mobilized to stabilize the markets. Crucially, Washington and Tehran exercised a tacit restraint, holding back from launching catastrophic strikes against the Persian Gulf’s vital energy nerve centers. It appeared, for a time, that both sides could sustain a bitter stalemate of isolated airstrikes and targeted attacks on individual tankers without hurtling the global economy toward total calamity.
That fragile equilibrium has officially shattered. The conflict has now expanded to target the very infrastructure routes that previously served as safety valves, offsetting the severe constriction of the Strait of Hormuz. By mid-September, the Bab el Mandeb Strait—a crucial maritime chokepoint along the Red Sea route that acts as the primary alternative artery for moving oil and gas away from the Gulf—fell under the operational control of the Houthis, an Iran-aligned militant movement based in Yemen. Compounding this crisis, an explosive-laden drone launched by an Iranian-backed militia operating inside Iraq struck Saudi Arabia’s vital East-West pipeline, the infrastructure through which Riyadh had successfully diverted a massive share of its crude exports. The strike temporarily disabled the pipeline, cutting off millions of barrels of daily supply.
The financial fallout was swift and severe. International oil prices leaped from the mid-$70s per barrel in August to $110 per barrel by September. Industry analysts warn that if the remainder of the region’s energy architecture is permanently written off as a legitimate military target, subsequent supply disruptions could easily drive oil prices toward $150 or even $200 a barrel. The risk of rapid escalation has intensified following Houthi drone attacks on the Saudi cities of Riyadh and Yanbu, placing intense upward pressure on global energy costs. If this trajectory continues unchecked, an energy crisis capable of plunging the global economy into a deep recession is no longer a distant hypothetical.
Washington now faces the urgent task of navigating a way out of an increasingly untenable situation. Half a year of alternating military strikes and aggressive economic coercion has failed to force Tehran or its regional partners to the negotiating table. There is little reason to expect that intensified hostility—let alone threats to “annihilate” Iran, such as those issued by U.S. President Donald Trump during his address at the United Nations—will compel a change in Iranian behavior today. Furthermore, military experts emphasize that the United States and its allies cannot indefinitely protect vast networks of vulnerable energy infrastructure and shipping lanes against persistent asymmetric threats from drones, missiles, and hostile non-state actors.
Diplomacy, long sidelined, now stands as the least damaging option available. Washington must actively pursue a comprehensive diplomatic settlement with Iran to bring an end to the hostilities. Such an agreement must encompass not only a formal cease-fire but also guaranteed frameworks to keep vital global waterways open, alongside verifiable measures to ensure Iranian compliance. Simultaneously, Washington must urge Saudi Arabia to negotiate a parallel political settlement with the Houthis. Brokering these truces will undoubtedly demand painful concessions from both the United States and Riyadh. Yet, continuing down the path of open-ended war courts economic disaster—an outcome infinitely more painful than the compromises required for peace.
Shock Absorption and the Limits of Market Resilience
At the onset of the war, economists and energy analysts feared that the effective closure of the Strait of Hormuz would trigger an immediate, catastrophic energy shock and a severe global economic downturn. Those fears were well-founded. Before the conflict erupted, nearly 20 million barrels of crude oil and refined petroleum products traversed the narrow strait daily, alongside close to 20 percent of globally traded LNG. By August, those energy exports had plummeted to roughly half of their prewar volumes. On certain days, fewer than ten commercial vessels dared to make the passage, a stark drop from the peacetime average of 130 to 150 ships per day.
Yet, the global energy system demonstrated an extraordinary capacity for adaptation, prompting the International Energy Agency (IEA) to describe the event as the most severe oil supply shock in history. Global benchmark crude prices spiked from just over $70 a barrel prior to the outbreak to more than $125 in April, before retreating back into the $80s and $90s, where they stabilized for months.
Several distinct mechanisms kept prices from spiraling out of control. First, non-Gulf oil production rose steadily. Producers in the United States, Argentina, Brazil, Canada, and Guyana collectively brought an additional 1.4 million barrels per day online. While this replacement output covered only a fraction of the missing Gulf supplies, every barrel proved crucial in a rapidly tightening global market.
The strategic release of emergency petroleum reserves also played a vital buffering role. In March, the 32 member states of the IEA authorized the coordinated release of 400 million barrels from state emergency stockpiles. This marked the largest coordinated drawdown in the agency’s history, more than double the previous record set in 2022 during the outbreak of the war in Ukraine. Commercial traders and major refineries similarly tapped into private inventories to compensate for lost Gulf crude, maintaining steady fuel production levels.
Simultaneously, global energy demand contracted significantly, led by a sharp consumer and industrial response in Asia. China, the world’s largest importer of crude oil, orchestrated a massive adjustment that saw its seaborne oil imports drop from more than 11 million barrels per day before the war to just over 7 million by August. Beijing drew down its massive 1.4-billion-barrel domestic stockpile, ordered state refiners to process less crude, and restricted domestic fuel exports to ensure local supplies of diesel and gasoline remained adequate. As energy analyst Javier Blas noted, China effectively functioned as a "swing importer," stepping back from international markets when prices spiked to leave vital barrels available for other buyers, thereby averting acute price shocks.
Gulf producers also utilized alternative export routes to bypass the blocked Strait of Hormuz. The United Arab Emirates relied on an inland pipeline connecting its southern oilfields directly to the port of Fujairah, located safely outside the Persian Gulf. Saudi Arabia maximized the capacity of its East-West pipeline, which transports crude oil from the kingdom’s eastern fields directly to the Red Sea port of Yanbu. For much of the conflict, this single pipeline moved between four and five million barrels per day, serving as the single most critical alternative export artery.
Finally, a degree of restraint exercised by the primary belligerents helped limit the overall destruction. While notable incidents occurred—such as an Israeli strike on Iran’s South Pars gas field in March, which prompted Iranian retaliation against Qatar’s Ras Laffan refinery and knocked out 17 percent of Doha’s LNG export capacity—these attacks remained the exception rather than the rule. Although more than 80 major energy facilities across the region were struck, including Saudi Arabia’s Ras Tanura port, Bahrain’s Sitra refinery, several Kuwaiti processing plants, and the UAE’s Habshan gas complex, the vast majority of the region’s critical infrastructure survived intact.
This preservation was deliberate. Iran, Israel, and the United States largely avoided sustained, large-scale campaigns against major oil fields, processing hubs, and export terminals because all sides recognized the mutual peril. Given the inherent difficulty of intercepting swarms of drones and missiles, massive infrastructural strikes would have succeeded, inevitably triggering devastating reprisals in kind. Washington, bowing to intense pressure from Arab allies fearing total regional escalation, refrained from carrying out the sweeping bombardments of Iranian energy facilities threatened by President Trump. Tehran similarly withheld strikes against its neighbors’ vulnerable installations, aware that its own oil and gas infrastructure—the final economic lifeline of the regime—would face total destruction. It was an energy-market equivalent of the Cold War’s Mutually Assured Destruction doctrine.
The Buffers Break
Today, those temporary shock-absorbing mechanisms are rapidly failing. The relative stability observed in global energy markets over the past several months was the product of extraordinary, one-time adjustments, rather than an indication that the international energy system can indefinitely endure a war that continuously destroys critical infrastructure. Countries have already deployed the quickest and least economically damaging tools at their disposal. With easily mobilized production already tapped, alternative transit routes compromised, and emergency reserves running dangerously low, policymakers have few viable options left.
While oil and gas production outside the Middle East will continue to grow, that expansion will happen gradually. Further supply increases require extensive new drilling operations, long-term investments, and the construction of complex pipelines that will take years to materialize. Meanwhile, the world’s remaining spare production capacity is overwhelmingly concentrated in the Persian Gulf, where exporters are increasingly cut off from safe transit lanes. Another major global energy producer, Russia, is poorly positioned to compensate; Moscow has halted the export of most refined fuel products, and its own energy infrastructure has suffered extensive damage in its ongoing war with Ukraine.
Further reductions in global energy demand remain possible, but only at an increasingly catastrophic economic cost. Major importing nations, led by China, have already conserved fuel, curtailed refinery runs, substituted alternative energy sources, tapped emergency stockpiles, and absorbed punishing price highs. Suppressing consumption any further risks forcing widespread factory closures, crippling global transport networks, and triggering a sharp contraction in overall economic activity.
Simultaneously, emergency state inventories have reached perilous lows without being replenished. Strategic reserves are designed to bridge temporary market disruptions, not permanently replace sustained production losses. The U.S. Strategic Petroleum Reserve has fallen below 300 million barrels, marking its lowest level since the 1980s.
Most critically, the alternative export pathways relied upon by Gulf states have now been compromised. Following the drone strikes on Saudi Arabia’s East-West pipeline, Riyadh was forced to shutter the transit corridor, instantly removing up to four percent of global oil supply from the market. Repairing the damage could take days, weeks, or longer, and the facility remains vulnerable to repeated attacks. In the Red Sea, the Houthis have consolidated their grip on Yemen’s western coastline, seizing the port city of Mokha and strategic islands surrounding the Bab el Mandeb Strait. Having declared a formal blockade on Saudi shipping in July, the group now enforces it using advanced drones and missiles. Neither the Bab el Mandeb nor the Strait of Hormuz can be considered safe for commercial tankers, particularly those carrying Saudi crude.
Without the means to offset another major supply shock, the latest escalation threatens to unleash an energy crisis with devastating global ramifications. Shortages of diesel—the fuel powering global trucking, agriculture, heavy construction, industrial manufacturing, and much of the world’s shipping fleet—will ripple rapidly through the broader economy. Diminished LNG supplies will place severe upward pressure on electricity and heating markets, particularly as Europe approaches the winter heating season with inadequate gas reserves. Concurrently, global fertilizer shortages will drive up agricultural production costs and threaten future crop yields.
The economic burden will not be distributed equitably. Wealthier nations possess the financial leverage to outbid poorer developing countries for scarce energy supplies. Numerous import-dependent nations already face severe fuel shortages, widening fiscal deficits, and agonizing choices between cutting popular fuel subsidies—which risks triggering widespread civil unrest—and maintaining them at the expense of national financial stability. Central banks worldwide are already struggling with stubborn inflation driven by high energy costs; implementing further interest rate hikes to combat inflation would choke off economic growth, particularly in developing economies already suffering from fuel scarcity. Public protests fueled by energy shortages have already erupted in Guatemala, Indonesia, the Philippines, Portugal, and elsewhere. Without a diplomatic resolution, initial fears that a regional war would produce global financial instability are materializing.
Returning to the Negotiating Table
Averting a full-scale global economic crisis requires the United States to fundamentally rethink its current strategy. For nearly seven months, Washington has pursued a campaign of military strikes against industrial infrastructure, combined with aggressive economic pressure through comprehensive sanctions and a naval blockade. Yet the Iranian government shows no signs of collapsing or capitulating. The regime, dominated by hardline veterans of the Islamic Revolutionary Guard Corps who remain largely indifferent to the suffering of the Iranian populace, appears fully prepared to sustain a protracted conflict. Tehran retains sufficient economic breathing room, relying on clandestine assistance from Russia and China, a trickle of continued oil sales, and financial reserves accumulated earlier in the war when the Trump administration briefly eased select sanctions. For Washington and its allies, however, the mounting economic and military costs of the war have become unsustainable.
Washington should avoid attempting to simply resurrect the informal framework negotiated with Tehran in June. That previous agreement failed to place any binding constraints on Iranian-aligned proxy networks currently attacking regional energy infrastructure, nor did it restrict Iran’s indigenous missile and drone programs. Furthermore, that accord was heavily tilted in Tehran’s favor, offering substantial economic incentives—including access to a $300 billion reconstruction fund, the complete termination of international sanctions, and the unfreezing of billions in foreign assets—without retaining sufficient leverage to curb Iranian nuclear activities. A constructive path forward requires starting fresh or negotiating substantial structural modifications to the June terms.
Any renewed diplomatic initiative must prioritize a comprehensive cease-fire covering attacks on energy infrastructure by all participating parties and their proxies: the United States, its Arab partners, Israel, Iran, the Houthis, and armed groups operating in Iraq and beyond. Washington should condition this cease-fire on a firm commitment from Tehran not to advance its nuclear capabilities, while signaling that any future U.S. military response to a nuclear violation would be strictly confined to nuclear installations. In exchange, Iran would receive negotiated sanctions relief, the return of selected frozen assets, and reconstruction assistance, provided it strictly adheres to the terms of the accord.
Immediate relief would ripple through global energy markets: the United States would lift its naval blockade of Iranian vessels, while Tehran would halt all mining operations in the Strait of Hormuz and cease attacks on commercial tankers utilizing its shipping lanes. Ideally, negotiators would establish a multilateral governing authority to oversee and collect reasonable transit fees for vessels passing through the Strait of Hormuz. While unrestricted free transit remains preferable, some form of regulated fee structure has become practically unavoidable, given that prior diplomatic talks tacitly acknowledged Iran’s right to collect maritime transit payments. The optimal outcome would involve a cooperative system incorporating all Persian Gulf littoral states—including Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE—rather than a bilateral arrangement dominated solely by Iran and Oman.
A U.S.-Iranian accord alone will not eliminate all risks to the regional energy grid. Tehran lacks absolute operational control over the autonomous Houthi movement, meaning Riyadh will likely need to pursue a separate, direct cease-fire agreement with the group to fully secure its energy installations. Securing such an agreement will be a formidable challenge, as the Saudi dispute with the Houthis is deeply intertwined with Yemen’s protracted civil war. Any viable deal will likely require accepting Houthi participation in future Yemeni governance structures and providing the movement with economic benefits, including a formal share of national oil revenues. Washington should urge Riyadh to pursue these negotiations urgently, before the conflict escalates further and threatens the internal stability of Saudi Arabia itself.
An end to hostilities in the Persian Gulf would yield profound strategic benefits for the United States. Global energy prices would drop sharply, alleviating severe supply shortages and lowering inflationary pressures worldwide. The immediate danger of an escalation destroying the region’s energy infrastructure and plunging the global economy into recession would recede. Furthermore, Washington would gain the flexibility to draw down its military footprint in the Middle East, rebuild depleted munitions stockpiles, and restore broader military readiness. Iran, too, would secure vital economic relief, removing the constant threat of devastating strikes against its domestic energy sector while reaping substantial financial rewards from restored oil exports, new transit fees, sanctions relief, and international aid.
Whether the mutual benefits of a cease-fire—and the terrifying risks of continued warfare—will compel both Washington and Tehran back to the negotiating table remains uncertain. Both capitals have displayed a historic reluctance to lay down arms without achieving a decisive victory. Iranian decision-makers may misinterpret renewed American diplomatic overtures as a sign of weakness, encouraging them to stand firm. However, the dire condition of Iran’s domestic economy, characterized by negative growth, runaway inflation, and a plummeting currency, provides a compelling incentive for a diplomatic off-ramp, particularly among political elites increasingly anxious about regime survival. To encourage a pragmatic calculation in Tehran, the United States should make the proposed terms of any agreement public, highlighting the tangible economic benefits awaiting the Iranian population to stimulate internal pressure on the regime. Washington should also enlist Beijing’s diplomatic assistance; China has a profound national interest in preventing an energy shock that would severely damage its own economy.
For its part, the Trump administration must demonstrate a willingness to compromise. Any diplomatic resolution at this advanced stage will expose the White House to political criticism that the United States expended substantial blood and treasure for an outcome that left the region, and Iran, in a stronger position than before the conflict began. Such critiques carry weight; justifying the war in retrospect is impossible. Beyond its heavy human and economic toll, the conflict has drained U.S. military resources, strained alliances by raising questions about Washington’s commitment to protecting its partners, and provided Iran and other regional actors with renewed incentives to pursue nuclear weapons capabilities.
Yet the administration retains no attractive alternatives. Continuing an open-ended military campaign or relying purely on economic pressure is unlikely to yield a superior outcome to negotiation. A sustained war risks triggering an economic catastrophe if energy infrastructure is systematically destroyed through design, miscalculation, or unauthorized rogue attacks.
A negotiated settlement could ultimately deliver political benefits for the White House. While initial criticism would be unavoidable, a formal end to the war and the subsequent drop in global energy prices would be met with profound relief across the United States and the international community. The longer-term strategic costs of the conflict would likely fade from public view, allowing thorny issues such as the Iranian nuclear file to be set aside for future diplomatic management. With global economic catastrophe averted, international attention would inevitably shift elsewhere. As the Middle Eastern proverb observes: the dogs bark, and the caravan moves on.
