Iran conflict has laid bare longstanding risks to the West and to the global economy

This is an excerpt from the Final Comments section of my broader Article:
https://talkmarkets.com/article/stocks-stage-extraordinary-recovery-but-war-oil-inflation-and-debt-still-loom-large-1776804292

The ongoing oil supply disruption in both the Persian Gulf and Red Sea has illustrated in stark terms that the global economy has long needed to adapt its energy markets and supply chains to be more flexible and less concentrated—much like the reshoring of manufacturing and diversification of supply chains we have been seeing in the wake of the pandemic and the recent trade negotiations.

For example, we are already seeing Very Large Crude Carriers (VLCC) rerouting to the US Gulf Coast to buy substitute crude oils, like West Texas Intermediate (WTI) in place of Arab Light, or light low-sulfur (“sweet”) WTI Midland in place of UAE’s Murban, or medium-sulfur (“sour”) Mars Blend from US offshore production in place of Iran Light. Much of these new shipments are mostly destined for refineries in Asian countries like China, Japan, South Korea, and Taiwan. Perhaps buying from the US will become the new normal for many of these oil-deficit countries; it would certainly boost our GDP.

The disruption has kept spot shipping rates high, which has been good for tanker stocks. It also has jacked up insurance cost. Before the conflict, an oil tanker transiting the Strait of Hormuz might be charged a risk premium of about 0.10-0.15% of the ship’s hull value. But at the height of the conflict, those rates (if you could find coverage at all) had spiked to as much as 7.5-10% (i.e., 100x higher). So, if the hull value of a VLCC is $140 million, it might have cost $10-14 million in insurance premium for a single transit. The largest Ultra Large Crude Carriers (ULCC) can be worth $200 million.

This whole scenario has laid bare a vulnerability that’s been building for decades: the global economy’s dependence on critical supplies of crude oil, LNG, nitrogen-based fertilizers (e.g., urea, ammonia), petrochemicals, and industrial metals (e.g., aluminum) sourced from the volatile and politically unstable Middle East, where shipping can be so easily disrupted at the choke point of the Strait of Hormuz.

Oil and natural gas markets are tightly interconnected, so even localized disruptions can ripple across continents, driving up costs of transportation and manufacturing—and ultimately food, as critical fertilizers, many of which depend on natural gas or are exported from geopolitically sensitive areas, are even more fragile. When supply chains are threatened, the impact doesn’t stay confined to energy markets; it hits agricultural yields, food prices, and inflation globally. In other words, what looks like a regional conflict quickly becomes a global economic stress test.

Yes, energy is the lifeblood of the economy, and nowhere is the fallout from disrupted supplies more visible than Europe, where prices are sky-high and in fact on the verge of running out of fuels (most imminently jet fuel). In particular, Germany made the conscious ideological decision to shut down all of its vast nuclear plants (not mothball for the future, but fully decommission, which it completed in 2023) and trade energy independence and reliability for the utopian pursuit of complete decarbonization and the removal of all (overblown) risk of nuclear meltdown. They had become completely reliant on Russian gas (which is now completely eliminated), imported pipeline natural gas from Norway (limited supply), and LNG shipments (from the US and Qatar). And because the country’s vast renewable energy farms are non-dispatchable, when wind/solar production is low, it also imported electricity from France’s nuclear plants. It’s a decision they now regret.

The Trump Administration is seeking to keep the US from succumbing to the same cultural and economic fate that has befallen Europe, UK, and much of the West by circling the wagons around North and Central America (plus Venezuela) to create a de facto “self-sufficiency zone,” with the US as the hegemon, independent of critical materials and energy supplies from hostile nations. It also seeks to promote capitalism and win the race for AI, blockchain, quantum, and space dominance. Incentivizing surplus domestic energy production (“drill, baby, drill”) that can be exported to the rest of the world (as a preferred alternative to Middle East suppliers) is part of that agenda, thus boosting GDP, fostering high-paying jobs, and improving our trade balance, while potentially generating billions of dollars in tax revenue for federal and state governments.

To comprehend how the world allowed Iran’s radical jihadist regime to fester for 47 years and spread mayhem without ever confronting it, you must understand that the risk wasn’t just military, it was systemic. Any direct confrontation could trigger energy shocks, destabilize allied economies, and create second-order effects like political unrest due to rising costs of living—and Western populations don’t like discomfort. And because there is always another election coming up, politicians first and foremost seek to avoid hard decisions that might cause discomfort. As a result, policymakers chose containment strategies, sanctions, and diplomacy rather than decisive confrontation, even as Iran expanded its regional influence through proxy groups and asymmetric tactics. From a purely strategic standpoint, kicking the can down the road was seen as the least disruptive option in the near term.

This helps explain why previous US presidents historically approached Iran with caution, reluctant to challenge the saber-rattling, apocalyptic, theocratic regime for fear of a blockade or increased terrorist activity. But that approach came with a cost. Over time, Iran continued to build out its military and technological capabilities while deepening ties with major powers like China and Russia. Each US president stood idly by (or even tried to pay them off to encourage good behavior) while Iran continued to increase its military and nuclear capabilities, intimidate its neighbors, and fund terrorism and chaos around the Middle East and beyond through its proxies, including upon Israel and US military bases.

This gradually shifted the balance of power and increased the potential consequences of any future conflict. The longer the situation persisted, the more complex and dangerous it became—not just militarily, but economically and diplomatically. What may have once been a contained regional issue began to evolve into a broader geopolitical challenge with global implications. Tensions ultimately reached a breaking point; the culmination of years of strategic deferral in which the perceived risks of acting earlier were outweighed by the growing risks of waiting too long. The argument had shifted from whether to confront the risk to when and under what conditions. Indeed, facing down this growing threat had to happen soon, before Iran’s military capabilities—supported by China and Russia—reached the point of no return, where deterrence becomes far more difficult, the costs of intervention multiply exponentially, and the potential fallout of military confrontation could be catastrophic.

As described by DataRepublican on Substack, “The convergence of all three (nuclear capability at threshold, terror proxy network at its peak, Hormuz leverage [i.e., control of the world’s most critical oil chokepoint]) at the same moment created the strategic logic for preemption before any one of the three became impossible to address.” So, here we are today.

Of course, Iran’s regional power came solely from its vast oil reserves. Venezuela had a similar situation, but as its production dwindled due to incompetence and corruption, it also became a narco-state and profited by cozying up to the likes of China, Russia, and Iran, allowing them to establish a foothold in the Western Hemisphere and place operations, personnel, and surveillance right in our backyard while tapping into Venezuela’s vast oil reserves by merely paying off its corrupt dictatorial leadership. But ultimately, Venezuela’s regime turned out to be much more rational, with life and wealth being its priorities, while Iran is led by a fanatical, apocalyptic theocracy that embraces death in service to God.

Iran’s stubborn intransigence reminds me of the opening battle scene in the movie Gladiator between the Romans and Germanic tribes when second-in-command Quintus states, “People should know when they are conquered.” Of course, nobody wants to “conquer” Iran. President Trump doesn’t really want to destroy its critical power infrastructure and bridges, either. That would be a humanitarian disaster, likely creating another painful mass migration situation. He just wants Iran’s leaders to behave like civilized members and active participants in the global economic community.

The olive branch or “carrot” has not worked for nearly 50 years. Throughout that time, the jihadist regime continued to foment widespread terrorism, with the sworn objective of “Death to America, the Great Satan,” and aggressively pursue development of ICBMs and nuclear warheads to dominate the Middle East and ultimately destroy Israel and the US and create a global caliphate free of infidels. It’s tough to bargain with such a monomaniacal mindset.

So, regarding Pope Leo’s veiled criticism of President’s Trump actions against Iran, the Catechism of the Catholic Church (CCC) includes the following passages. CCC 2265 regarding “Self Defense” admonishes, “Legitimate defense can be not only a right but a grave duty for one who is responsible for the lives of others. The defense of the common good requires that an unjust aggressor be rendered unable to cause harm. For this reason, those who legitimately hold authority also have the right to use arms to repel aggressors against the civil community entrusted to their responsibility.”

And CCC 2308 regarding “Just War Doctrine” asserts, “All Citizens and all governments are obliged to work for the avoidance of war. However, as long as the danger of war persists and there is no international authority with the necessary competence and power, governments cannot be denied the right of lawful self-defense, once all peace efforts have failed.”

Something tells me the Pope is well aware of these passages, but you might not be.