The war in Iran is setting off a global economic shock wave. In this episode, the Opinion editor Steve Stromberg speaks with the Bulwark economics editor and MS NOW anchor Catherine Rampell on how the Trump-made war is likely to affect global trade and the cost of living for Americans.
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The transcript has been lightly edited for length and clarity.
Stephen Stromberg: We are in the second week of war with Iran. We have already seen thousands of casualties in Iran and the Gulf region, as well as American military deaths. And then there’s the economic fallout — that’s what we’re going to be talking about in this conversation.
We’re taping on Monday as the price of oil is fluctuating wildly. President Donald Trump tried to deflect criticism in a press conference Monday evening.
Audio clip of Donald Trump: I knew oil prices would go up if I did this, and they’ve gone up, probably less than I thought they’d go up. But I don’t think that anybody thought we were going to be this quickly successful. This was a military success the likes of which people haven’t seen. We have the best military.
To help us understand this situation and what it means for the economy, I’ve invited Catherine Rampell to join me. She is an economics editor at The Bulwark and an anchor for MS NOW. Catherine, welcome.
Catherine Rampell: Great to be here.
Stromberg: So the weather’s getting warmer. Spring break is around the corner. Are you planning any long road trips?
Rampell: I am not; I have a baby. So long road trips are not in the cards for the time being, which is fortunate because — I know where this is going.
Stromberg: You have an idea?
Rampell: Yes. Gas prices are getting higher, although I am very glad we bought an E.V.
Stromberg: Let’s talk about what’s happening. Why are all eyes turned on the Strait of Hormuz?
Rampell: Most Americans wish that they did not have to know about the Strait of Hormuz, but it turns out it is a very important choke point in the world. This has mostly been characterized as an oil crisis, but I would say it’s a little bit more like an everything crisis, or at least it could be, because there is so much stuff that transits through this one, 21-mile-long choke point.
Americans have likely heard about the oil that goes through the strait. Something like 20 percent of the world’s oil normally transits through this strait, which is on Iran’s southern coast. But that strait has effectively been shut off because Iran has been threatening ships that go through, and some of them have been attacked. In some cases, Iran is obviously responsible. In other cases, we still don’t entirely know. But the net effect is that traffic has come to a virtual halt, and that means a few things.
It means oil has gotten a lot more expensive, but so have other things. A lot of the world’s fertilizer, for example, or the feedstock for fertilizer, goes through this strait. This is important at any time of year if you are going to have a disruption in that supply chain. But it is especially important right now because spring planting is about to start, or in some places has already started, and so you’ll have higher food prices.
And lots of other things are affected, too. For example, there’s a lot of sulfur that comes from oil. It’s the feedstock for sulfuric acid, which is used to extract copper, cobalt and other kinds of important ingredients for lots of products. So you can’t make transformers, E.V. batteries or lots of other things without those supplies.
Then you have liquefied natural gas — something like 20 percent of the world’s L.N.G. comes from Qatar, which announced they were shutting down production last week. That caused L.N.G. prices to spike. So there’s a lot of economic activity that comes from this very, very small region of the world. And because of globalization, all of these markets are interconnected, and that’s why it matters.
If people are listening to this and maybe have some post-traumatic stress from the Covid-19 supply chain crises, this could potentially be just as bad. Except in this case, it’s more of a man-made disruption because of this war, as opposed to a pandemic.
Stromberg: The list of prices of goods this might affect is probably longer than the list of goods it won’t affect, given the pervasiveness of oil and natural gas across the economy.
Rampell: Lots of stuff gets shipped using energy of some kind, whether it’s gasoline or diesel or another kind.
Stromberg: Right, exactly.
Rampell: And it’s not only about not being able to ship stuff; it’s also about the supply of stuff at this point, because places like Iraq are running out of storage. Since they cannot ship oil, they only have a limited ability to store the stuff they are producing. If they start producing less because they have nowhere to put it — even if, magically, the war were to end tomorrow and everything went back to normal militarily, geopolitically and economically, and for shipping — you would still be in the hole. There would still be a deficit of production that would start to spook markets even more. It’s not just about getting things moving again; it’s that we are now backed up in terms of how much stuff can be produced.
Stromberg: For years we’ve heard about energy independence. Trump likes to talk about energy dominance, and yet the American economy remains vulnerable to disruptions in Middle Eastern oil supply. Why is that? We’re producing so much oil and natural gas — why aren’t we more insulated?
Rampell: Well, we are more insulated than we were in the 1970s. We are now a net exporter of petroleum products and have been relatively consistently for the past few years. That happened under the first Trump administration, and throughout the Joe Biden administration, and still today under the second Trump administration. So that does give us some insulation. And if you look at what has happened to energy prices in Europe, they are up much more, at least as of this taping, than they are in the United States, in part because we do have our own supply here and Europe is much more reliant on the global market.
So there are a lot of consequences here. It’s not as bad as it could be. I’m not sure that is going to be super comforting to American consumers to say, Oh look, it’s so much worse in Europe. Congrats. That’s not really going to insulate the administration or Trump’s party from the political repercussions of all of this.
So there are a lot of different routes in which this will come for American consumers, even if we are producing quite a lot of oil and natural gas ourselves.
Stromberg: So what options, if any, does Trump have to restrain oil prices, alleviate the supply concerns and deal with some of these tangled webs of global supply?
Rampell: Well, he could not start a war in the Middle East — that would probably be the most obvious way.
Stromberg: Well, too late for that.
Rampell: Too late for that, I know. If only somebody had informed him.
This is something that has bedeviled presidential administrations many times before. Every time there is an election year, in particular, presidents wish they had a dial that would allow them to turn down gasoline prices, and they don’t. In this case, it turns out that they have a dial to turn up gasoline prices but in any event, the kinds of tools that are available can help things a little bit on the margins.
So we have a strategic petroleum reserve here in the United States. As of this taping, the administration has not said it will tap into it. But if this war goes on for a very long time and if the Strait of Hormuz is effectively blocked for a very long time, the strategic reserves aren’t going to make much of a dent, especially since market participants are forward-looking. They can see how much oil is being released from these reserves in comparison to how much oil is being held back — either not shipped or, again, not extracted at all because of this war.
Stromberg: So people can see that there’s this big gap in how much is being supplied, and they can look at how much is in the reserves and say, there’s a big discrepancy between these two. The reserves can’t make up for what we’re losing.
Rampell: Right. And the reserves are supposed to be there in an emergency. You don’t want to just drain them all immediately, because there may be some other contingency that governments are understandably worried about — it’s not just about this particular military conflict.
They have also suggested that they would provide insurance for tankers that are worried not just about transiting through the strait, but are not insurable right now. Because who wants to insure a big oil tanker that is worth a lot of money? The vessel itself is worth a lot, and the cargo is worth a lot of money that might get blown up.
Trump has said that he would provide this sort of emergency insurance. They’ve also talked about having a naval escort for these ships, but everyone I’ve spoken with who knows more about military resources than I do has said this is not a viable option. Normally, there are dozens of ships that go through the strait each day that would require an escort. It’s just not a viable thing to do.
Stromberg: The U.S. Navy doesn’t have a ship for every tanker that they would need to escort.
Rampell: Yes, or a fleet of ships for that matter. They’ve talked about intervening in oil-futures markets or doing some targeted tax breaks. But none of these things are really going to make that big of a difference.
Again, this is something that prior administrations have struggled with, because voters blame the president for higher gas prices. Usually I would say that the blame is not particularly deserved by a president, because presidents don’t exert that much control over energy markets. But in this case, voters may actually have a point.
Stromberg: Trump recently called the spike in oil prices “a very small price to pay” for peace. On Monday afternoon, he told a CBS News reporter, “I think the war is very complete, pretty much.” Even since we started taping, the price of oil has gone down a bit.
I know you’re not a foreign policy expert, but you are a close watcher of Trump and the economy. Where do you see this going from here? Do you think he’s backing down? Has he reached the point of too much economic discomfort?
Rampell: It’s clear that he cares about gas prices. In fact, this was one of the things that he highlighted in his most recent State of the Union address.
Audio clip of Donald Trump: Gasoline, which reached a peak of over $6 a gallon in some states under my predecessor, is now below $2.30 a gallon in most states. And in some places, $1.99 a gallon. And when I visited the great state of Iowa just a few weeks ago, I even saw $1.85 a gallon for gasoline.
He overstated how cheap gas was, but he was very proud to talk about it. And now, of course, the reverse has happened. Gas prices have shot up because of the actions of this administration, whatever other merits there may have been for going to war. I will let other people weigh in on the strategic or geopolitical merits.
In terms of the things Trump has cared about — gas prices and their economic impact, and the broader affordability question — this is going to be very painful for him, and it’s not clear he has a solution for that. Does that mean he backs down? I don’t know. There’s the TACO trade — that “Trump always chickens out.” But markets don’t seem to think that he’s going to chicken out here. And it’s not even clear what that would look like at this point. What would the offramp be?
Stromberg: By TACO trade, you mean that when things start to look tough, he suddenly switches positions even though it seemed like he wasn’t going to back down.
Rampell: Right. The TACO trade is the idea that Trump is not willing to take a beating from the markets — that if the market falls, if equity markets fall, or if oil prices rise, he’s going to back down because he just doesn’t want to deal with the fallout. The result is that people are increasingly betting that he’s just not going to carry out his threats.
The problem with that is the feedback loop gets short-circuited. If traders think it’s not worth reacting to the economically damaging thing that Trump does, because they think he won’t be willing to sustain the pain, then they don’t end up inflicting the actual pain and Trump maybe doesn’t receive the signal. There is a risk here that if markets don’t give enough of a slap on the wrist to this president, then he will continue doing things that markets don’t like, or that would be bad for the economy.
We don’t know what this is going to mean for the war effort. There are a lot of other considerations that I’m sure this administration has, besides what happens to gas prices. As they should: Our foreign policy should not be dictated solely by what happens at the pump, even if that is the thing that is most salient to consumers. But it’s also a bit harder for the Trump administration to maintain their strategy or objective, outside of the economic consequences, if we don’t really know what their strategy or objective is. And that has been changing as well.
It’s hard to put these puzzle pieces together. What are they prioritizing? How much weight is this administration giving to the economic costs? We can’t say if we don’t know what benefits they are trying to extract from this foreign adventurism.
Stromberg: And how about the political costs? Gas prices are, as you say, politically salient any year. But this is a midterm year, when the current president’s party typically loses seats. What’s at stake for him politically? How do you see the current situation in Iran and Trump’s determination to go forward playing out in the coming weeks and months?
Rampell: We don’t entirely know what the president’s objectives are. If you think that he has started this war to distract from domestic problems at home, which may be the case, he will have ironically made those domestic problems much worse. There are a bunch of reasons why this war of choice is a political liability for the president, including that he ran on a campaign of no more foreign wars.
The MAGA movement tends to be very isolationist. They don’t want money going abroad for any purpose. That is a political vulnerability in and of itself. But then on top of that, you have this economic impact. Affordability is Trump’s biggest political issue. It is among his biggest vulnerabilities and is probably the issue that has weighed down his approval ratings more than anything else. If you look at how positively Americans viewed this president on the economy, on inflation, on cost-of-living questions versus how negatively they view him today, this has been a huge turnabout and a huge weight on him. And that was the case before this war started — the president came into office promising to reduce prices and instead has enacted a bunch of economic policies that have likely increased prices.
I cannot imagine that voters will reward him for that. Voters may not prioritize the deaths of schoolchildren in Iran. They may not prioritize the deaths of U.S. service members in the Middle East as much as we would like them to. But they will surely notice if they go to the gas station and gas has gotten a lot more expensive and they now have trouble paying their bills. Voters always punish the incumbent party for gas prices. Again, whether or not they are responsible. In this case, you can definitely draw a line between actions that the administration has taken and something that voters are very angry about.
Stromberg: You mentioned the MAGA isolationist base and the question of whether Iran and this adventurism abroad will maybe split that up a bit. Why wouldn’t a more isolationist-minded American look at the situation we have right now — that America is producing all this energy, is a net exporter of oil, has plenty of natural gas — and just say: Close it off? They might say, the problem is not that Trump has been too aggressive in shutting the United States off from the rest of the world, but that he hasn’t gone far enough — just keep all of it here in the United States and we won’t have to care about what happens in Iran or anywhere else. What’s the flaw in that reasoning?
Rampell: Well, again, the world is interconnected. We have lots of globalized markets and connected supply chains. If we try to hoard all of the energy here, not just oil but also natural gas, that would have downstream consequences for other countries that produce stuff we rely on.
Other countries have already started hoarding oil. China has been hoarding various kinds of energy because of this war, because they get a lot of their oil from Iran. Understandably, they are worried about their access to energy. But that’s going to cause lots of disruptions there, too.
All of these things have consequences. There are cascading effects from all of these decisions, many in ways that are just not appreciated by this administration.
One piece of all this that I didn’t mention — you were asking before about the options the administration has to bring down oil prices or at least temper the increase — we have also decided to alleviate sanctions on Russia, which is essentially a petrostate. They get a lot of their income from oil and gas. We had these third-party sanctions in place that basically said, if you are another country that buys oil and gas from Russia, the U.S. is going to penalize you. Don’t buy it. And now, Treasury Secretary Scott Bessent has said, actually, we’re going to temporarily release some of those sanctions and allow Russia to sell more oil.
That means that not only are oil prices much higher today than they had been, but Russia also has a bigger pool of customers to sell to. All of that is going to fund their war chest in Ukraine, and reportedly Russia is also advising Iran on how to target U.S. assets in the area.
It’s a very perverse thing we’re doing because Trump started a war that caused gas prices to rise. We’re relaxing the sanctions on Russia, which is helping Iran to kill our soldiers. If anybody had thought this through even a little bit at the very beginning, most of these consequences could have been anticipated. Maybe not all of the palace intrigue and internal machinations of who’s going to replace the deceased ayatollah, Ali Khamenei — I don’t know how foreseeable that was; I’m not an Iran expert. But the idea that starting a war with Iran might lead to some very painful economic consequences and might cause us to have to make hard choices about sanctions on Russia — all of that was foreseeable.
The question is, did they consider it? Is anyone even advising Trump on these actions? Or are they just having to play cleanup every time they finally learn certain actions will cause certain reactions? Every time they try to clean up one mess, they’re creating another.
Stromberg: Wrapping up, you spend a lot of your time thinking about the economy. If you had to choose the biggest misconception the public has right now about why we’re at war and what it will cost them, what would that be?
Rampell: I would say the biggest misconception is probably that oil disruptions are about oil. Oil disruptions are about oil, but they’re also about everything else that oil is a feedstock for. All of the petrochemicals that go into other processes — industrial processes, the extraction of copper and cobalt and other materials — as well as various products that Americans buy. They’re not just going to see the warflation here reflected at the pump. They’re going to see it in almost everything that they purchase.
Stromberg: Catherine, thanks so much for joining us today.
Rampell: Thank you.
Thoughts? Email us at [email protected].
This episode of “The Opinions” was produced by Derek Arthur. It was edited by Kaari Pitkin and Jillian Weinberger. Mixing by Pat McCusker. Original music by Isaac Jones, Carole Sabouraud and Pat McCusker. Fact-checking by Mary Marge Locker and Kate Sinclair. Audience strategy by Shannon Busta and Kristina Samulewski. The deputy director of Opinion Shows is Alison Bruzek. The director of Opinion Shows is Annie-Rose Strasser.
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