The Politics of Hormuz
In November 1979, Iranian students seized the U.S. embassy in Tehran and took dozens of Americans hostage. Fifty-two of them would remain captive for 444 days, an ordeal that came to define the final year of Jimmy Carter’s presidency. America looked helpless, Carter looked weak, and the humiliation contributed to his landslide defeat to Ronald Reagan in November 1980.
What is sometimes forgotten is how useful the crisis was to Ayatollah Khomeini inside Iran. The revolution was still contested between Islamists, nationalists, secularists and the left. The confrontation with America helped Khomeini marginalize his rivals, consolidate the new Islamic order and strengthen the institutions that would eventually become the backbone of the regime.
The hostages were finally released on January 20, 1981, the precise day Ronald Reagan replaced Carter as president.
I don’t think history repeats itself so neatly, and Trump is certainly not Carter. But there is something about the episode that feels relevant to the way we are thinking about the Strait of Hormuz today.
We assume Iran wants a deal because the economic logic for one seems overwhelming. Keeping Hormuz constrained hurts Iran too. It makes exporting oil harder, increases the economic pressure on an already battered country and raises the possibility of a much larger military confrontation. Surely, the longer this continues, the greater Iran’s incentive to compromise.
Perhaps. But that assumes Iran is trying to minimize the economic damage.
The men who now control Iran may be optimizing for something else entirely. The IRGC has spent decades building its power around resistance to America and Israel. An external enemy strengthens the security state, makes internal repression easier to justify and reinforces the importance of the very institutions responsible for protecting the Islamic Republic. Economic chaos is obviously bad for the Iranian people. I am less certain it is always bad for the regime.
This is what makes Hormuz so interesting. Roughly one-fifth of global petroleum liquids consumption normally passes through the Strait, along with more than 20 percent of global LNG trade. There isn’t enough alternative pipeline capacity to replace those flows, which means Iran does not need to shut the Strait completely to matter. It simply needs to keep enough uncertainty around the flow of oil to keep the geopolitical premium alive.
And perhaps the most valuable thing Iran controls is not Hormuz itself, but time.
Every additional week of disruption raises shipping and insurance costs, complicates refinery procurement and keeps pressure on energy prices. Eventually the consequences travel from the Persian Gulf to the American consumer. Gasoline is one of the few prices people encounter almost every day, displayed in enormous numbers on street corners across the country. You don’t need to understand geopolitics to know when filling your car suddenly costs much more.
The U.S. midterm elections are on November 3. Trump is not personally on the ballot, but his presidency is. If Tehran believes sustained pressure on oil increasingly becomes political pressure on Trump and Republicans as November approaches, then the calculation around a deal begins to look different.
We are assuming time is working against Iran because the economic cost of keeping Hormuz shut rises every day. But what if, between now and November, the political cost to America is rising even faster? Then waiting becomes rational.
Iran does not necessarily need an agreement today if it believes the same agreement will be available later from an American administration under greater domestic pressure. It can negotiate, allow hopes of a settlement to rise, pull back, introduce new conditions and keep the possibility of a deal permanently just over the horizon.
We tend to interpret negotiations as evidence that two sides are moving toward each other. Sometimes negotiations are simply another way of buying time.
The Red Sea makes this more consequential. Pressure around Bab el-Mandeb means two of the world’s critical energy chokepoints can be under stress simultaneously. The world does not need to lose every barrel moving through either route for oil prices to rise sharply. Oil is priced at the margin, and the marginal barrel becomes very expensive when everyone starts looking for it at the same time.
This is why I am reluctant to assume the oil shock is behind us. Brent revisiting the $120-$135 area this winter would obviously require the disruption to persist, and there are many ways tensions could ease before then. But I think the probability of a prolonged disruption is higher than the market appreciates because Iran may simply be willing to suffer for longer than we think.
And if the oil shock lasts, it becomes something larger than an energy story.
Nearly every postwar U.S. recession in his historical sample was associated with a meaningful increase in oil prices. The relationship is not mechanical, and the American economy is less energy intensive than it once was, but there is a reason oil shocks have such an uncomfortable place in economic history.
Higher oil prices take purchasing power away from households while raising costs for businesses. Growth weakens at precisely the moment headline inflation begins moving higher. The Fed is left confronting two problems that ordinarily require opposite responses.
That would be difficult in any environment. It is particularly difficult now, when fiscal policy is already making monetary policy more complicated and the bond market increasingly appears unwilling to absorb unlimited government borrowing without demanding a higher price. A sustained oil shock would make that tension worse.
Which brings me back to Khomeini and the hostages. The lesson from 1979 is not that Iran will hold Hormuz hostage until November, or that Trump will somehow suffer Carter’s fate. Historical analogies become dangerous when we expect the details to repeat.
What interests me is the difference in perspective.
For 444 days, America kept wondering when the cost of holding the hostages would finally become too great for Iran. Khomeini understood that the confrontation itself had value. What looked increasingly irrational from Washington made sense when viewed through the politics of revolutionary Iran.
We may be looking at Hormuz through the same wrong end of the telescope. We are waiting for the economic pain to make Iran want this crisis to end. Iran may be waiting to see how valuable that pain becomes.