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They talk about the “fog of war”. In the conflagration currently consuming the Gulf and the Middle East, it is less the fog than the smoke as billowing black clouds spew from fractured oil refineries and storage units across the entire region, as well as from flattened military installations, civilian buildings and communities.
What an oil price shock looks like
In the course of Donald Trump’s hell being rained upon Iran and Tehran retaliating, the past week has seen the price of Brent Crude spike sharply from $83 on Friday 6 March to a peak of $117 on the 9th, and back down to $83 a day later. It has risen again to $102 at the time of writing on Friday 13th. $87 of gross peak-to-trough volatility (leaving aside all the intermediate price changes), representing 105% price movement in seven days for the world’s principal source of energy is extraordinary. Remember that only as recently as Christmas, even if briefly, Brent Crude was below $60. The international wholesale gas market has been almost as volatile.
Markets are hanging on every word and nuance that comes from the warring adversaries and reacting instantaneously: Trump’s mystery meaning behind his mangled “the war is very complete, pretty much”; Secretary of State for War Hegseth’s comically manic, embarrassing hyperbole (“Iran is toast”; it clearly is not); Iran’s public declaration that the Strait of Hormuz is shut and any shipping trying to run the gauntlet would be destroyed; the International Energy Agency commitment to release 400m barrels (equivalent to 20 days’ lost supply through the Straits) from the strategic reserve to ease global supplies. The visible evidence of the physical destruction of refining and storage capacity across all the Gulf nations only adds to the narrative that this is not merely a story about the transportation of 20% of the world’s supply of oil and gas but a more systemic production problem. It prompts anxieties that even if the shooting war stops soon, a return to automatic balance between supply and demand is far from assured.
“About turn!”
Investors are rapidly having to reassess the economic outlook based on far from perfect information. Only a very short fortnight ago, the authorities and the bond markets envisaged a UK inflation path from 3% in January gently subsiding towards 2% (the Bank of England’s official target) by the end of the year. Having kept Base Rates on hold in February at 3.75%, investors had “priced in” at least an 80% expectation that the UK Monetary Policy Committee would cut by a quarter point in March to 3.5%, with a further cut assumed later this year. That confidence has evaporated. Not only do markets think the chance of a March cut is now less than zero, but with the risk of inflation rising again and depending on the duration of the conflict and the disruption, there is the possibility that Base Rates may have to rise at some stage in 2026. In the government bond markets UK 3-Year and 5-Year Gilt yields, both of which are used as the basis for pricing fixed-rate mortgages, have jumped by 70 basis points (i.e. 0.7 of a percentage point) and 64 basis points respectively, with one brief exception the highest they have been since November 2023.
Similarly, in the eurozone: the public stance of the European Central Bank was that with disinflationary pressure and already recording an average eurozone-wide inflation rate of 1.9% and inside the 2% target, the ECB was done with cutting interest rates any further. Facing the same global exogenous shock as everyone else, and notably with heavily industrialised Germany almost entirely exposed to the vicissitudes of international gas markets (having lost its piped supplies from Russia, it is now 95% reliant on LNG shipped from the US), rather than leaving rates on hold at the next meeting, probability says that the risk to interest rates in the eurozone is also on the upside. At 2.96%, German 10-year government bonds now carry their highest yield since mid-2011.
For both the UK and the EU, the prospect of a tightening monetary policy programme to combat incipient inflation (with the memories of the accusations of central banks being asleep at the wheel in similar circumstances in 2021) is painful. One would not normally be pursuing such a strategy when already encountering sluggish economic growth and rising unemployment. Further, earlier this decade when confronted with the inflationary effect of the Covid dislocation and Putin manipulating the price of gas ahead of invading Ukraine, central banks were starting from a point when nominal interest rates were virtually zero in the UK and the US and negative in the eurozone, and all real interest rates were still negative (i.e. the interest rate was less than the prevailing inflation rate). Today, they would be contemplating raising interest rates whose starting point is positive in both senses putting a disproportionate burden on borrowers. Chancellor Rachel Reeves will be painfully aware that even before the conflict had broken out, the Office of Budget Responsibility had already taken a knife to the projected GDP growth rate for the UK economy, cutting its estimate for 2026 from 1.4% to 1.1%. Twisting the knife as if in confirmation, the latest data from the Office for National Statistics pointed to zero growth in the UK economy in January.
So, Mr President, precisely what IS the plan?
Trump has unleashed the furies. The rights and wrongs, the legitimacy and illegality of the cause are all debatable. But having initiated action, he and Benjamin Netanyahu are not in complete control of the outcome. With confused, contradictory and inconsistent public statements, the war aims remain as opaque as at the beginning of the war. They assumed the regime would fold and the Iranian populace would rise in rebellion. Neither is in evidence. 21st Century air power might be a surgically precise tactical instrument, but employed on its own it remains a blunt strategic tool. Boots are needed on the ground to finish the job and to begin the reconstruction to make the strategic purpose complete. Politically, such a course is unacceptable in the US.
This is an asymmetric contest in which the combined military might of both the United States and Israel far outweighs Iran’s. Yet despite the “snake” being “decapitated” with the loss of a significant number of its principal leaders on Day One (and speculation is mounting that the new Supreme Leader, confirmed as injured, is not the one in charge, that it is the Iranian Revolutionary Guard orchestrating the response and pulling the strings), the Iranian ability to create regional industrial and commercial havoc, and worldwide dislocation more broadly, has been significant. It was not America’s plan. Iran might be down but it is certainly not out; left intact, the regime’s ability to regenerate itself may have more dangerous consequences if Trump draws stumps early for political expediency and declares a premature victory. He is potentially in a bind of his own making, for which yet more air power may not be the solution. By whatever means, having started the job, he now must finish it conclusively and decisively.
The law of unintended consequences: Putin in the driving seat
The wider security consequences of Trump’s inability to bring the conflict to a satisfactory conclusion (i.e. one which produces regime change) are already becoming alarmingly apparent. Trump is clearly rattled by the oil price reaction and the political consequences back home. A one-hour call with President Putin on Monday in which the two leaders shot the breeze and figuratively put the world to rights despite Putin still refusing to engage on anything but his own terms in Ukraine and offering very public support for Iran, has led to the likelihood of Trump relaxing oil sanctions against Russia.
Putin might be struggling to make headway militarily in Ukraine, but from a geostrategic standpoint, there is no doubt: he is in the driving seat. The two conflicts, one in Iran, the other in Ukraine, have now been conflated. Not only is Putin getting away with murder and the democracies have proven unable to do anything to stop him, today he can dictate terms. Ukraine and every European NATO country should be recoiling in alarm at the consequences and implications. But the Middle Powers have been reduced politically to irrelevant bystanders. We have absolutely no doubt that while China remains inscrutably silent about current events, General Secretary Xi will also be taking note of the obvious western weak spots. Both Putin and Xi will be delighted and completely satisfied that “allied” disunity and ineffectiveness when confronted with a crisis remains reflexive.
The hubris of a President
In his geopolitical analysis “Peace & Perversion” published only a week before Trump went to war with Iran, Jupiter Merlin Investment Director Alastair Irvine defined the strategic delinquency inherent in Donald Trump’s National Security Strategy of the United States of America. Far from the self-proclaimed “non-interventionist President of Peace” creating a more stable and secure world, he stated ill thought-out US interventionism and lack of diplomacy “in America’s interests” taken in combination with Trump’s corrosive contempt for his allies, would not only make the world less stable, but could make the United States itself less secure.
“Quod Erat Demonstrandum” was used by the Romans to describe proof of a theorem; in the case of US strategic delinquency the proof is emerging even sooner than anticipated. Welcome to the new world in which the tidy international rules based order and the opinions of human rights lawyers have been left far, far behind.
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