The Economist
Prices have risen sharply. Unfortunately, they still have further to go
Apr 30th 2026
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6 min read
SoMEONE WAS sniffing the butane. Energy experts have long warned that the war in Iran was causing the biggest oil-supply shock in history. The closure of the Strait of Hormuz shut in 14m barrels a day of oil. To destroy that much demand, they said, the price of Brent crude should be more than double its pre-war level, at well over $150 a barrel. But oil traders were in a stupor. As recently as April 17th prices were below $90 a barrel. Over the past week, on talk of renewed fighting, they have been waking up. On April 30th prices spiked above $125.
Unfortunately, as bad as things are, the disconnect with reality endures. Not only may spot prices have further to climb, but the oil-futures market, in which speculators bet on where the oil price is going, says prices will fall every month for the rest of the year, ending 2026 at about $88. That implies most of this shock will soon be reversed. If so, traders must believe three things are true: that America and Iran will soon strike a peace deal; that their agreement will reopen Hormuz; and that, soon after the strait is clear, petrol and jet fuel will once again be plentiful. All those are in doubt.
One thing everybody should be able to agree on is that for the strait to stay shut would be a disaster. At the start of the war, lots of oil was in stocks or tankers at sea. But the ships that passed through Hormuz before the conflict had all docked by April 20th. Oil stocks will soon be at their lowest since satellite tracking began in 2018. Volumes of petrol, diesel and jet fuel at sea are already so low that gaps in supply will be inevitable. And in America petrol demand is about to surge, as the summer tempts people to get in their cars and drive.
Everybody should also acknowledge the stakes. Asia’s petrochemical industry has already idled capacity. Since the war prices of diesel and jet fuel have doubled in Asia and more than doubled in Europe. Unlike stockmarkets, where bubbles can be sustained by animal spirits alone, the price of oil is tethered to the economy at petrol pumps, docks and airports. If supply falls short of demand, prices must rise to bring about balance. There are already reports of barrels of diesel selling for $600. Good cheer cannot supplant reality.
The case for optimism is obvious. Donald Trump’s wild posting signals not just that he is rudderless, but also that he will step in whenever oil prices rise too high. Iran’s economy is broken: it urgently needs cash, which means it, too, will want a deal. If an impasse brings ruin to both sides, it will end.
The Economist is loth to second-guess those who have the facts to hand and billions of dollars at stake. However, markets have a poor record of pricing geopolitical risk. And with oil, they struggle to assess the complexities of the physical trade.
Even if a deal is in both countries’ interest, it could be hard to nail down. Each side may be underestimating the other. Mr Trump seems to think he holds all the cards. But Iran has endured long disruptions to its oil exports before, at the onset of Mr Trump’s “maximum pressure” sanctions campaign in 2018. Iran is not a democracy and the regime can survive while its people suffer. It has an incentive to hold out in the hope of a good offer for as long as it can. Mr Trump can resume the bombing, but that is as likely to delay a deal as catalyse one.
Likewise, with midterm elections looming in America, Iran’s leaders may think that Mr Trump cannot tolerate a high oil price. Yet Mr Trump is selfish. He may try to constrain price rises at home by limiting exports of refined products. The midterms are already lost, in the House at least, he may think. He is surely less bothered about the careers of Republican politicians than his own humiliation if he strikes a nuclear deal with Iran that looks worse than Barack Obama’s in 2015. His latest signal to Iran is that he is hunkering down for a long blockade.
Even if a deal is struck, the strait may not completely re-open. For one thing, the fearsome details of a nuclear pact will take months to negotiate. Now that Iran has discovered that it has leverage, it may be tempted to apply pressure with threats to close the strait again. And threats can lead to attacks. Perhaps Mr Trump will put the eradication of the nuclear programme before the complete re-opening of the strait—after all, America is an energy exporter. Supposing that America agreed to let Iran treat Hormuz as a tollgate, what then?
And even if the strait is open in principle, getting fuel into fuel tanks in practice will remain vulnerable to many unknowable delays. You can expect a rush of oil as waiting tankers escape fully laden into the Indian Ocean. But for empty tankers to return to the Persian Gulf will be more complicated. Many will have taken up bookings on other routes. The strait will need demining, which could take months. Insurance rates could be prohibitive, so governments may need to organise a scheme to cover extreme risks. Shutting down production could have damaged oil wells. Restoring output will also take time. Partially mothballed refineries won’t immediately return to full capacity.
The world is only starting to get to grips with what may lie ahead. Central banks may soon face the second inflationary shock of the decade, after the covid-19 pandemic. In Asia many governments have already taken drastic measures, such as shortening the working week. Europe’s governments will also have to change gear. So far they have focused on supporting consumer demand. They may have to deal with demand destruction—and, given the possibility of shortages of diesel and jet fuel, plan to protect food-delivery and vital services.
It will never happen, will it?
Bullish investors could be in for a nasty shock, too. The recovery from covid, Europe’s adaptation to the loss of most Russian gas and Mr Trump’s moderation of his tariffs have all led traders to trust that things always work themselves out. Amid strong corporate profits in America it may seem as if the world economy can bear any shock—and that Mr Trump will obviously back down before a catastrophe. The pain of a scenario that oil analysts have feared for decades is approaching. It will not be pretty. Get ready. ■
