War & Oil – Falllout From The Attack On Iran

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Approximately 18 billion words have been generated by news organizations and social media since Israel — with the willing assent of the United States — began its attack on Iran three days ago. Heather Cox Richardson, the unflinching American historian, wrote today that on Meet The Press on Sunday, Lindsey Graham, the fiercely loyal supporter of the alleged president, was asked by host Kristen Welker if this social media statement by the president was accurate: “Hopefully, [Iranian troops] and Police will peacefully merge with the Iranian Patriots, and work together as a unit to bring back the Country to the Greatness it deserves.”

Welker asked Graham, “Is ‘hope’ the plan for the future of Iran?” Graham replied, “No, the future of Iran is going to be determined by the Iranian people. The new Iran, whatever it is…our goal is to make sure it cannot become again the largest state sponsor of terrorism.” Welker responded, “But is there a plan to make sure that happens…does the president have a plan to guarantee that that happens?” Graham responded with some heat: “No. It’s not his job or my job to do this.”

Great. Yet another war in the Middle East and the senior leaders of the nation don’t have a clue what they are doing. In fact, according to Richardson, as the bombs started dropping the president was hosting a million dollar a plate fund raiser at Mar-A-Loco. Starting a war without a plan borders on criminal negligence — if for no one else, then for the members of the military who are expected to be maimed or killed in order to negotiate this deliberately created fog of war.

Paul Krugman On The Economics Of War

Since leaving his post as a financial columnist for the New York Times, Paul Krugman has expanded his focus and now writes on Substack not only about financial topics, but also what the causes and ramifications of them might be. In his post for March 2, 2026 entitled War, Oil, and the World Economy, Krugman offers his insights regarding this adventure and the OPEC oil embargoes of the late 1970s. I found his analysis cogent, and wanted to share it with you.

I remember the gas lines and the panic they instilled. I remember the Iranian hostage crisis and the sense that we were all at risk from political instability on the other side of the world. I remember how soaring energy prices were followed by soaring inflation across the board.

Now Donald Trump has taken us to war with the nation that was at the epicenter of that crisis. Obligatory disclaimer: The Iranian regime is evil, and it would be a good thing if this war leads to its demise. But my topic today is the side consequences of the US attack.

Almost everyone assumes that the economic fallout from Operation Masculine Insecurity Epic Fury will be much less severe than the fallout from the rise of the mullahs nearly fifty years ago. And they’re probably — probably — right.

But it’s worth asking why the world economy looks less vulnerable to instability in Iran now than it did in 1979. The main explanation isn’t what you may think. And it’s also worth asking what new vulnerabilities have emerged over the last 47 years.

Iran, while a significant oil producer, accounts for only a modest share of total world oil production. On that basis alone one would not expect a shutdown of Iranian exports, which is presumably happening as you read this, to cause a huge spike in world oil prices.

However, in 1978 Iran didn’t account for a large share of world oil production either. So why did world oil prices rise 165 percent after the Iranian Revolution? Fears of disruption in other Middle Eastern nations led to speculative hoarding, followed by Saudi production cuts that kept prices high. The lesson for today is that when assessing the impact of events in Iran on world oil markets, we need to consider the impact on exports from Iran’s neighbors.

And that’s somewhat worrying. In 1979 radical forces in Iran, whatever they did to oil production and exports from their own nation, couldn’t disrupt exports from Saudi Arabia, Kuwait and so on. Today the Iranian regime possesses large numbers of missiles and drones, which it has already used to strike Dubai, Bahrain, and other states in the region. Shipments of oil through the Strait of Hormuz, which is how most Middle Eastern oil reaches world markets, appear to have come to a more or less complete halt.

And the world still relies heavily on Middle Eastern oil. The Middle Eastern share of world production is only slightly lower now than it was in 1978. This share has remained high despite the fracking-based rise in U.S. production…..which has made America self-sufficient in oil but hasn’t changed the fact that Middle Eastern oil remains crucial for the world economy as a whole.

As of this morning, oil prices were about $10 a barrel higher than they were in mid-February. That will add approximately 25 cents to the price of a gallon of gasoline. So far markets are in effect betting on a short, not-too-disruptive war, although that could change. Yet the economic effect of an oil price shock should be less than it was in the 1970s, for two reasons.

First, major economies are much less dependent on oil than they were in the 1970s. The “oil intensity of GDP” is the ratio of oil consumption (measured in terawatt-hours of energy) to real GDP, measured in 2017 dollars. This indicator has declined more than 70 percent since the 1970s, which basically tells us that today’s economy uses much less oil to produce a given amount of output than the economy of the 1970s. The U.S. economy has tripled in size, but oil consumption now is about the same as it was in the late 1970s.

How did we manage that? Among other things, the gas mileage of the average car has roughly doubled. Also, cheap natural gas has replaced oil in many uses, for example in home heating, and renewable energy is also starting to make a dent.

The reduced oil intensity of U.S. GDP means that even if the current war causes a large, sustained increase in oil prices, there will be less economic damage inflicted as a comparable increase would have done a few decades ago.

The 1979 oil shock hit an economy that was already suffering from persistently high inflation. Furthermore, it was an economy in which, to use Federal Reserve jargon, expectations of future inflation had become “unanchored.” Companies reacted to sudden price increases by raising their own prices in the belief that there would be more to come, workers demanded wage hikes to offset the rising cost of living, and so on. As a result, the 1979 oil price shock set off a wage-price spiral.

Today, inflation — while still running above the Fed’s target of 2 percent — is much lower. Moreover, surveys show that most people expect inflation to return to normal levels in the future. So any effect of the new war on inflation will probably be transitory. So far, so reassuring. Yet there are, as I see it, at least two reasons — in addition to the threat to shipping — to be more worried about a war in the Middle East than we would have been decades ago.

First is financial fragility. In 1979 the US financial system was still highly regulated, so that there was little room for serious bank runs and other disruptions. Today many observers have been warning about potential risks to financial stability, most urgently from private credit. Could the Iran war trigger a broader financial crisis? I don’t know, but it doesn’t seem alarmist to be worried.

Also, might the war burst a market bubble? The price-earnings ratio for the S&P 500, was low in 1978 but is very high now. Will those high valuations be sustainable if the fallout from the war causes significant economic damage?

Finally, one point I haven’t seen many observers emphasize is that the modern Middle East now plays an important role in the world economy that goes beyond its status as a major source of oil. Dubai in particular is an important node in the global financial system, as well as playing host to many extremely rich people who thought they had found a safe haven. One indicator of that changing status is the transformation of Dubai International Airport into one of the world’s most important travel hubs. To the extent that the war disrupts this new role for the region, that will be another risk to the world economy.

I don’t want to engage in doom saying. But I do worry that people are too complacent about the economic risks this war creates.

If You Fail To Plan, You Plan To Fail

“If you don’t know where you are going, you aren’t likely to end up there,” Forrest Gump told us. Wars led by people how are more concerned about their position on social media are hobbled by muddled thinking and a disastrous lack of planning. As a result, the US has now given itself yet another black eye among the the community of nations. Being the neighborhood bully is not a recipe for respect — or the mark of a leader. And it certainly disqualifies that leader from being considered for a Nobel Peace Prize — ever.