What happens if the Strait of Hormuz stays closed?
In this video, I argue that the current conflict involving Iran, Israel, and the USA could trigger a seven-stage global economic crisis that will unfold over the rest of this year.
We are already seeing rising oil prices, higher food costs, and growing fears in financial markets. But I suggest that this may only be the beginning.
I explain:
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Why oil shortages matter far beyond petrol prices
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How inflation could surge again
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Why central banks may make the wrong decisions
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How supply chains could begin to fracture
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Why business failures may follow
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And why this could eventually become a banking crisis bigger than 2008
This is not about panic. It is about understanding economic cause and effect before events spiral further out of control.
The political response so far has been dangerously complacent. Meanwhile, the economic consequences are already arriving in people's daily lives.
This is the audio version:
This is the transcript:
The current crisis arising from Donald Trump's war on Iran has a trajectory, and it will unfold, in my opinion, across seven distinct stages. Each stage will build on the last, accelerating the damage that will be caused, and we have already entered the early stages. The full sequence could play out by Christmas, and understanding these stages now is essential to understanding what is coming our way and the damage it will cause.
What is clear, right now, is that the Strait of Hormuz between Iran and Oman remains completely closed at this point of time, and that Donald Trump has no idea how to reopen it, and may simply be abandoning this problem, resorting to propaganda falsehoods instead.
Meanwhile, Iran is continuing to exploit its asymmetric advantage in this war with considerable success, and the impasse between these parties continues as a result, and the economic consequences are already mounting. The seven stages of development of this crisis are then in play, and that is what this video is all about.
Stage one of this process has already happened. Commodity markets have already noted what is happening in this war and have already responded to it. Almost certainly, they've got their reaction wrong because they assume the crisis will be over soon, but that's just sweet and deeply naive of them. The fact is that oil, gas, fertiliser, and other raw material prices have all gone up heavily already. Oil is now settling at well over $100 a barrel, and I stress that these are anticipatory price rises ahead of actual real shortages in the market. Markets are pricing fear right now and not yet reality, but the price signals are real enough and are beginning to feed through, and that leads us into stage two of this crisis.
Stage two of this crisis develops when the raw material price increases seen in stage one begin to flow through to consumers. We are, of course, seeing that this is already happening. The most visible impact so far is at the petrol pump, but food prices are also rising, although not by as much as yet as they are likely to do. Even the Bank of England admits they will increase by a great deal more as this year progresses, and I think they're understating the risk even then. The key point here is though that this stage is also already underway. We are seeing the impact of this war in our pockets right now, but the worst of the supply chain transmission is still ahead. That's the key point to make.
The third stage of the economic crisis that we are in is when central banks begin to make the wrong calls with regard to interest rates. We've already seen all the central banks warning that they might increase interest rates if oil prices remain high, and the likelihood that we're going to see those interest rates rise very soon is very high indeed. It could be as soon as next month. There is a meeting of the Bank of England on 18 June to consider this issue. By then, oil price shortages will be happening, as I will note very soon.
The consequence would be that we would have an increase in the cost of money, which is absolutely the wrong thing for the Bank of England to do at this moment because we do not have an economy that is overheating because of an excess of demand within it, but one that is in crisis because of a shortage of demand within it for most goods and services because people are going to have to reallocate their money towards essentials like fuel, energy, and food, and will not be buying anything else. And therefore, at this moment, an interest rate increase will only make matters worse by reducing demand for all the more peripheral items in life, which are already going to be in crisis because of a supply chain problem. This policy error from our central banks will then make this crisis significantly worse. But it is going to happen, I have no doubt about that, and that is what stage three of this crisis will represent. It is when the central banks move in to make everything worse.
Stage four of this crisis will begin sometime in mid-June, according to all current forecasts, and that is when real shortages of products will begin to hit us. Petrol, diesel, jet fuel, and oil-based energy are the first casualties that we're going to see. Those are likely to happen by mid-June. Reports are already coming through that stock levels are already being reported to be falling rapidly, and they could run out by the middle of June. That is when the shortages will really begin to hit because there will be no buffer left to provide for the shortfall in absolute supply. Those absolute supplies are running at the moment at around 80% of normal levels. That does not mean there will be no petrol, no diesel, no jet fuel, and no gas. It does mean that these things will suffer an absolute shortage of supply, and that means that rationing will take place.
Rationing can happen in two ways. It can either happen through the price of the product, or it can happen by government intervention to control physical supply. Either way, there is going to be major disruption, and it will become concrete, and it will become unavoidable, and it is going to have a very big real-world impact.
Stage five of this crisis develops when supply chains fracture as a result of fuel shortages. Without physical rationing, that could very easily be by the middle of this summer and with rationing, it's still going to happen, but by early autumn. There simply will be too little fuel by that stage to ensure that everybody gets what they need on time to keep products moving through our economy, and that will create the supply chain disruptions that I'm talking about.
Food supplies will be most vulnerable. They are going to be severely disrupted and quite soon, because, of course, the timescales involved in moving food from field to plate are quite low, but that issue will be exacerbated as well by issues around fertiliser supply. Just getting crops to market might be the big issue with regard to fuel, but whether there are crops at all will be another issue we will have to worry about, and that is going to hit as we move into the autumn.
And, in addition to that, raw material shortages will spread across many sectors of the economy. People will find themselves without essential items, as will businesses, most importantly, and they will not be able to produce. It's quite ridiculous that if you miss a single washer whilst you're building a car and you can't find it anywhere else, then you can't build that car, and that brings the entire supply line to a halt. This may well be the sort of situation that we face. We don't know where supply chains are going to break. That they will break is almost certain, and government intervention will be necessary, but may not come. That's my key point.
That leads us to stage six of this crisis, and I think that this will be something that will be happening by early autumn and stretching on from there towards Christmas, by which time there will be a major issue with regard to businesses failing. Businesses with limited financial reserves will not be able to survive sustained supply chain disruption. That's why businesses had to be supported by the government during the COVID crisis. We will face the same problems again now, and unless businesses are able to meet customer demand, which they will not be able to do if they cannot make or get the products that they need to sell, they will face mounting losses.
The first response might be short-time working. This is what happened in 1973 when we had a crisis with regard to energy supply. But closures will follow as funds run out. If the government is not willing to provide the scale of support that it did during the COVID crisis to prevent our economy falling apart, we will see large parts of UK business fail during the course of this autumn. Unless action is planned and even taken now, this will happen. No ifs or buts. We will see economic failure, and we are in trouble if we do not anticipate it at this moment.
Finally, there is stage seven of this crisis, and that happens when we get a banking crisis. We are going to have such a banking crisis later this year unless we take action, and it could be on a scale bigger than that of 2008. Business failures and job losses will leave both commercial and mortgage customers unable to service their debts to banks. The resulting financial stress will hit the banks directly. This is the point at which the financial system itself comes under threat. And when we also have potential failures in the $2.5 trillion private credit or secondary banking system, this might just compound the problem. All of this could happen before the end of this year. It's not scaremongering to say so. It is just an exercise in reasonable anticipation. We are in trouble.
And at this moment, any resolution to the war with Iran will come too late to prevent a lot of this happening. That's because political pressure on both the USA and Israel to end this war will not, I think, arise until we reach something like stages six and seven of this crisis, and by then the damage will already be done.
Like 2008 and like COVID, our politicians will react too late. We will be in recession and heading towards depression before they even realise the scale of the problem that's going to hit them. And the scale of the global economic impact is hard to overstate.
That is the problem, and that is because we are in a situation where the impasse in the Strait of Hormuz is holding, and Trump has no credible strategy to reopen that waterway.
Iran has every reason to hold onto its position of strength, and European governments, and maybe that of China, are too cautious to impose meaningful pressure on either the USA or Israel at present to end this war. So nothing is likely to shift before the autumn at the earliest.
What might happen then? We may get a break in the deadlock. But that depends entirely upon the political and economic pressure that is brought to bear on Trump and Netanyahu, either internationally or in the elections scheduled in Israel and the USA then. But none of this is likely to arrive soon enough to prevent this crisis being genuinely described as such.
This is the trajectory, then. Seven stages, some already underway, and each of them accelerating as the year progresses, creating more and more chaos and unpredictability as this process advances. It's going to get serious from early autumn, and maybe even earlier with regard to fuel shortages, and the window of opportunity to act is narrowing with each passing week.
Political and economic pressure must be built now. The cost of inaction will be measured in lost livelihoods, lost opportunity, failed businesses, financial and political crisis, and not just in statistics. We are already inside this crisis and not watching from outside it, and it seems that no one wants to stop it. That is the most worrying thing of all.
That's what I think. What do you think? There's a poll down below. Please let us have your opinions. Please like this video if that's what you do. Please share it. And if you'd like to make a donation to the work of this channel, we'd be very grateful.
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Thanks for that considered analysis; I hope you are wrong but I fear you are right. If you are right much damage will be done and many people hurt.
But I’d like to try to be positive and look past the unfolding disaster. I’d like to try to find some positives.
Firstly, it should be apparent to all that relying on a precarious supply of fossil fuels is very unwise. In the oil shocks of the 70’s there was little alternative. Now there is the alternative of renewable energy and there are already signs that people and countries are turning towards it. This will take time but it will be good for the environment, good for political stability (with countries no longer held hostage to fossil fuel), good for our standard of living, and reducing monopoly power by decentralizing energy production.
Then there will, I hope, be changes in supply chains. This will be the second major disruption in a decade. Hopefully companies will draw back from the nonsense of just-in-time production. Whilst this may increase profits in good, stable, times, it is a hostage to fortune in bad times. International trade is both beneficial and inevitable but not critical dependence for just-in-time production. Drawing back would improve security of supply and, hence, reduce international pressure.
And then there are the financial aspects. In the 2009 crash “too big to fail” institutions were bailed out. Perhaps governments will have learnt from that. The proper way to deal with that is (at least partial) nationalisation, not bailing out wealthy owners and bond holders. Capitalism should be made to work properly with risk takers losing their money, not socialising their losses. And, perhaps, governments will have the courage to break up large monopolies.
One can hope.
We have to
There was partial nationalisation, HMG “acquired” large holdings in major banks…then always “OK’ sold-out (albeit at a profit)…why not hold – take the divis…BUT have some say in the running of the bank?
There is one country at the root cause of all of this, Israel. It is calling the shots with respect to the USA, it wants Iran to become a failed state (although the bullshit narrative is “regime change”). We have been here before: 1967, 6 day-war and 1973 Yom Kippur war – both of which led to the end of the post-WW2 “settlement” & the rise of neo-liberalism. Both caused by Israel. There is a peaceful and non-violent solution to the “Israel-problem”. No-tade, close the embassy, expell all Israeli-citizens from the UK (and the EU if it has the balls to do the same) and close borders with Israel. NB: most of Israel’s trade is with the EU and to some extent the UK. Sadly, Israel has anticipated this and to a large extent, the Tory and LINO politicos are pro-zionist and pro-Israel (any criticism results in expulsion). All of which shows that UK politicos care not one jot for the well being of UK citizens. Even the right whinge (fart-rage and Yaxley-Lennon) profess love for Israel (why?).
& a PS: when somebody like Tucker Carlson is saying that US support for Israel is not in US interests, & indeed, the influence of the Israel-lobby in the US gov’ needs to be eliminiated you know the game is up.
May I take issue with your statement that both the 6 day war and the Yom Kippur war were both caused by Israel. I think that is more than just a simplification, I think it is wrong. Caused by Israel in the sense that they would not have happened if Israel did not exist.
The 6 day war started when Israel attacked Egypt, but they dd so in response to Egypt closing the Straits of Tirat (?) to Israeli shipping, isolating the Israeli port of Eilat.
The Yom Kippur war started when several Arab states launched co-ordinated attacks on Israel.
But, as with all Middle East conflcts the immediate cause is not the only thing to be considered. The issues are long-standing and deeply seated with blame on all sides, starting, I believe with the UK colonialist government.
Israel’s current, appalling aggression is on a different scale to previous aggressions in the area.
Israel is a thorny subject whose essential core is human tragedy.
Having had the bombing of Gaza and now Lebanon transported into my living room, I decided to binge on the Jewish side of the equation – their suffering – and revisited the Holocaust. I watched all of Lanzmann’s ‘SHOAH’ and Simon Schama’s ‘Road to Auscwhitz’ along with ‘The Nazi’s: A Lesson from History’ for good measure.
Result? Whether or not you think Zionists over-egg the existential threat to Jews, there is a hell of lot of evidence against this world of ours about what has happened to Jews over the years. However, the world’s Jews do not have a monopoly on suffering at the hands of humanity. Should the Armenians also be elevated in human consciousness? Rwanda anyone? Yugoslavia? Is it all just about scale or is it the suffering?
The fundamental issue is this: what makes human beings covet that which other groups have to the point where they are willing to deny them life by any means? To make them ‘unhumans’?
These are not just Jewish, Armenian questions or other identities: they are human questions. What is this darkness that lies within us? How is it activated? What must we do to keep it in check?
My answer is not new – it has been tried and forgotten already:- an economics and law that re-distributes resources fairly. That is my only conclusion in fighting the Devil that is covetousness.
Keep doing what you are doing Richard until your last breath – if you can. I do not charge you with this as you have chosen it yourself and I have no right. But you are doing the right thing, for sure.
Fair comments.
Closing the straits to shipping from Eilat. The Israeli response was: pre-emptive destruction of the Egyptian airforce and the invasion of other countries and occupation of the Sinai peninsular. Perhaps it’s just me but that seems a bit of an over-reaction on the part of Israel (negotiate? jaw-jaw, not war-war?). 6 years later (1973) the Suez canal remained closed (wonder where “super tankers” came from – Suez canal closure) and “negotiations” had gone nowhere. Could one blame the Egyptians for wanting the Sinai back? Perhaps not. UN? toothless. USA? toothless. So oil as a weapon and a sneaky attack. Counter factual: 1968, Israel pulls back from Sinai, & thus no reason for Egypt to attack, & thus no coordinated & massive oil price increase in the 1970s. Neo-liberalism was given a leg up by Israeli actions. & things in the region has got progressively worse due to Israeli actions.
Mike
My comments are really that there is no starting point for the blame of what has happened and it is over-simplifying to blame Israel for what happened since 1947. Blame Israel for their recent appalling aggression, but even that needs looking at in context. I blame the UK government for the support they have offered to Israel.
@PSR all correct but if you have been on the receiving end of *insert-anything* it seems worse if you then rinse-and-repeat.
Israel’s actions in Palestine from the Nakba onwards are appalling. And continue in the ilegally occupied territories…see latest two-tier approach to the death penalty that passed weeks ago. Apartheid? Of course. Is anybody calling it out…let alone doing anything about it?
The answer is blowing in the wind.
What occurs to me is the treatment and commodification of money is laid bare.
Money is a man made resource, and can be issued free of charge by State banks, yet it is treated as if it were rare or now only produced in the Gulf and or coming through the Straits of Hormuz like oil and over charged accordingly. And we are putting up with this charade, when such money could be used to address short term and long term effects. It ossifies our dependency on the unreliable and destructive use of carbon basically.
It’s strange to think that we have been consuming the death of previous life on this planet in order to live as we do. And in doing that, we are condemning our economy and ourselves to death and suffering. What a bleak way to live, when we could live from life itself – the wind, the sun, the waves and tides.
God, we’ve got it all wrong haven’t we?
I still hold on to the possibility that the U.S./Israel relationship could come unstuck as both leaders of those nations are so capricious and have effectively used each other – this could be a weak spot. But what it might lead to I have no idea but make no mistake – more death will be involved for we seem to be addicted to it at this moment in time.
“ God, we’ve got it all wrong haven’t we?”
Yes
Interesting figure from the US, the top 10% (?) spend about 2% of their income on gas 9petrol) the bottom 10% spend about 20%
Its easy to see how if we get to petrol/diesel shortages unless there is some sort of rationing it might not end well for those who are ‘conspicuously consuming’
Also as you rightly say a lot of the outcomes are decidedly ‘non linear’
Agreed
Not just fuel . The same relationship exists for food.
I’m beginning to think that inflation is being deliberately created as a political strategy . Like when Nixon took the dollar off the gold standard.
This is a grave crisis. Once the supermarket shelves start emptying, panic buying ensues and local supplies soon run out. This will rapidly morph into major social unrest and a potentially revolutionary situation. Strict rationioning needs to implemented as soon as possible, as in the 1970s.
Regrettably the Great Trump Depression is now a certainty.
Can the UK avoid it? No.
Can the UK government take steps to try to mitigate it? Yes.
Will the UK government act prudently to achieve this? There do not appear to be any obvious signs of action coming out.
As you say the Bank of England will cripple the economy with the expected interest rate rises.
The interest paid on central bank reserve deposits needs to be either removed or slashed. I do not expect Rachel to do this.
The UK needs to immediately sign up to a Swiss deal with the EU. The latest Swiss deal includes a Swiss brake on freedom of movement and the EU agrees to consult with the Swiss on impending rule changes etc.
Stock up with what you can because all retailers will be running out shortly.
Will the UK learn from the Great Trump Depression? Unless neoliberalism is defeated, not likely.
We agree
One reason many people don’t understand the cost of living crisis is that all outlets – Governments downwards – never talk about disposable income. For someone on £100k, a loaf of bread is 0.0001% (ish!) of their monthly disposable income. For someone on £10k, it’s about 10%. Ok, my figures are inaccurate, probably, but the principle stands.
Excellent analysis Richard. Thank you
Thanks
This is being heavily watched on YouTube
I cannot help wondering whether we should be thinking in terms of Second World War rationing or something approaching it.
The Australian Reserve Bank raised the base rate last Tuesday. Obviously oblivious to reality and to the fact that demand will fall quickly enough without hitting those least in need of it the hardest.
This cartoon from Fiona Katauskas in the Guardian sums it up perfectly:
https://www.theguardian.com/commentisfree/picture/2026/may/05/does-the-rba-really-have-to-raise-interest-rates
Stage 3
[…] Two comments in one FT email this morning gave us a good clue that all my predictions about the failure to end the war in the Gulf are unfolding as I have predicted. […]