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Greetings from Dispatch Energy! A ceasefire between Israel and Iran was announced in an effort to halt renewed hostilities, potentially opening the door to a broader peace framework that could involve the United States within “two or three days,” as President Donald Trump asserted on Tuesday. Yet just hours later—and after Iran shot down an Apache helicopter in the Strait of Hormuz—Trump reversed course, pledging to “respond” to the strike on U.S. troops. The incident represented another hurdle in the ongoing quest for a settlement with the Islamic Republic amid ongoing disruptions to the world oil market.
But will a peace arrangement translate into relief from elevated energy prices? Probably not to the degree many Americans anticipate, and in any case, the war is likely to leave a lasting lift in prices over the long run.
Renowned military theorist Carl von Clausewitz offers an explanation for how peace can emerge after war (assuming neither side achieves total victory):
Because war is not driven by blind passion but is governed by its political aim, the value of that aim determines the sacrifices required in magnitude and in duration. When the cost of exertion exceeds the value of the political objective, the objective is abandoned and peace follows.
For the United States, the strategic objective now appears to be the destruction of Iran’s nuclear weapons program, with the political price being the economic toll of conflict and the president’s declining popularity. For the Iranian regime, the aim is preserving its own survival and its ability to project power, at the cost of the economic hardship produced by Western sanctions blocking its ports. For both sides, the Strait of Hormuz has stood as the pivotal arena in the contest to determine which side bears the heavier burden. Interestingly, the recent trouble in securing a durable truce suggests that neither side has yet reached true war exhaustion.
Still, the genie is out of the bottle, and the struggle over the strait will leave a lasting imprint on energy markets. In last week’s Dispatch Energy, Rory Johnston outlined the disruption the war has already caused (and could continue to cause) for oil markets, noting that a future closure of the strait remains a possibility. That scenario would embed a permanent risk premium into energy shipments that pass through this chokepoint.
Threatening the waterway has long been viewed as Iran’s potential ace in the hole, but historically Tehran has also devoted significant resources to strengthening its conventional military capabilities in hopes of deterring attackers. Now, Tehran has learned a hard lesson: it cannot realistically fend off a U.S. or Israeli strike, which makes the strait its sole bargaining lever against adversaries (unless it develops or acquires a nuclear weapon).
If Iran believes it can shut and reopen the strait at will, that will become its preferred tactic at the negotiating table. As a result, near-term pressure on energy prices will come from the uncertainty surrounding any peace deal, while a longer-run premium will be embedded in prices as the risk of future closures is incorporated. Some buyers, particularly in Asia that rely directly on Middle Eastern supplies using the strait, will face tighter supplies (and higher prices) than others.
While Trump maintains that any agreement hinges on the strait’s reopening, ensuring the strait is free of naval mines is far from straightforward. We do not know precisely how many mines Iran has laid or their locations, and even if we did, currents could have carried devices away from their initial sites. These mines pose a real danger to traffic, and insurers are well aware of that fact.
The Lloyd’s insurance market, which underpins coverage for ships passing through the Strait of Hormuz, has had to push prices higher amid the conflict. Insurance costs have jumped from under 1 percent per hull per transit to as much as 10 percent (meaning shipping firms could end up paying as much for insurance as the vessel itself after ten trips). These rates reflect the perceived risks of navigating the strait, and while viable routes to resume shipping may exist, they may not reach the levels seen before the conflict.
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</div>On top of all the risk and supply pressures that may keep costs elevated, there is also the phenomenon economists euphemistically call “asymmetric pass-through,” or more colloquially “rockets and feathers”: Prices surge quickly but retreat only gradually. This happens because households have already signaled a willingness to buy at current levels, so any retreat requires stronger competition to push prices down. Upstream cost increases tend to be priced in swiftly, whereas competitive price reductions unfold more slowly.
In practical terms, near term prices could ease somewhat, but they are unlikely to revert to “normal” unless new rivals enter the market. The United States and other nations may release additional oil from strategic reserves if the disruption seems temporary, which could provide some price relief.
Yet in the longer horizon, the risks tied to the strait have moved from theory into concrete reality. Everyone depending on commodities that pass through the strait now understands that delivery hinges on decisions made by a small group with imperfect transparency. This enduring risk (along with Iran’s ambition to monetize the strait) will surface in the prices of energy moving through the waterway and could nudge demand toward alternative sources—but that path is not straightforward.
Approximately 90 percent of the petroleum products moving through the strait head to Asia, with China alone absorbing about 37 percent of the total. Although Beijing has been trying to diversify its energy mix, it remains heavily dependent on Middle Eastern oil to sustain its growth. China is pursuing more purchases from Russia and seeking to curb oil use via electrification, yet it cannot escape the reality that Iran is among its largest suppliers, and almost half of China’s crude imports originate from the Middle East.
While some Middle Eastern producers are exploring pipeline routes to circumvent the strait, it remains unclear whether those lines can provide sufficient capacity to replace Hormuz. One major project is expected to nearly double a current capacity of about 1.8 million barrels per day, but even with that expansion, roughly 20 million barrels per day went through the strait before the war. In short, pipelines are not yet a viable substitute for Hormuz.
But there is a silver lining: the economy is not a fixed-sum game. Higher oil prices can create openings for new entrants, and since oil operates on a global market, added supply somewhere can influence prices elsewhere. As expected, the price rise has encouraged U.S. production growth. The caution is that the two largest U.S. suppliers—ExxonMobil and Chevron—have indicated they do not expect to grow output beyond levels planned before the war (for now). Oil extraction and refining is a long-run business, and investment decisions are shaped by more than the war alone, with looming hurdles (like politicized permitting) tamping down investor enthusiasm.
Of course, Washington must tread carefully with market interventions if it wants the market to discipline price increases. The discontinuation of a strait shutdown’s effect on prices creates clearer investment signals, so the question is whether those signals are strong enough to overcome the perceived risk. I suspect that creating favorable conditions for new production may matter more for long-run energy prices than merely trying to insulate the strait from risk, but the incentives are not fully in place yet.
The plain truth is that energy markets have been significantly disrupted by the war, not only due to the fighting itself but because the Strait of Hormuz will now always be seen as a higher-risk transit route. The fix, as always, is to let market forces discover ways to ease scarcity while our leaders pursue a durable peace.
More simply, if Washington can bolster domestic oil producers’ confidence and reduce barriers to expansion, prices will ease. If policy choices amplify investment risk, prices will stay elevated.
Policy Developments
- The Department of Energy’s push to advance next-generation nuclear energy technologies remains underway, and last week it selected the California-based Oklo company for its Surplus Plutonium Utilization program. This will enable participants to repurpose plutonium from retired weapons as reactor fuel. The move signals progress toward bringing newer reactor designs to market—an industry that has long suffered from lengthy permitting processes.
- Pennsylvania has unveiled fresh guidelines to determine which data centers qualify for tax credits. The rules emphasize environmental stewardship, community engagement, and labor standards. New Jersey has pursued similar actions. As A Axios notes, potential Democratic presidential contenders—Pennsylvania Governor Josh Shapiro and New Jersey Governor Mikie Sherrill—appear to be leading these efforts to minimize the impact of data centers on communities. If enacted, such policies could materially affect where and how quickly data centers are built.
- The Trump administration is expanding coal subsidies, proposing to spend roughly $700 million on coal projects through the Defense Production Act (DPA). Officials argue these steps will boost energy availability, especially given rising electricity demand from data centers. Critics contend the plan amounts to a taxpayer-funded subsidy to the coal industry. My latest Dispatch Energy column critiqued the administration’s reliance on the DPA, arguing that gains in targeted sectors may come at the expense of other sectors and yield net economic harm.
Spotlight on Breakthroughs
- American fusion energy startup Helion Energy has secured $465 million in its latest fundraising round. Fusion energy, which could in principle provide nearly limitless, safe, carbon-free power, has long been treated as the energy field’s Holy Grail. Yet progress toward commercially viable fusion has been slow. Helion’s fundraising milestone signals growing interest and confidence in the promise of fusion’s future.
Additional Reading
- One of the clearest examples of government protectionism is the Jones Act, which requires that goods moved between U.S. ports be carried on vessels that are built in, owned by, and crewed by Americans. The law has long been a frequent target for policy analysts due to the relatively small pool of eligible vessels compared with demand for shipping, with critics arguing that it exerts a sizable and difficult-to-measure impact on prices. However, data on the policy’s effects on the energy sector became more accessible after the Trump administration waived its requirements in response to the recent spike in energy costs. Writing for the Cato Institute, Colin Grabow examines the data on energy shipments under the waiver. The temporary suspension of the Jones Act led to a notable increase in domestic maritime energy trade, suggesting that the Act may have imposed a larger constraint on the industry than previously realized.
