Iran War: The Chickens Come Home To Roost

Is this the end of the world or something completely different?

Pumped dry. We will eventually get there, although not right away. Image via Unsplash

By starting the war on Iran, the US unknowingly lit the funeral pyre of the complex globalized world economy it was building for eight decades. With the Strait Hormuz still being shut and with energy infrastructure under direct attack, the world has slipped into the biggest oil crisis in history, threatening to end in a global economic depression. But is this war really, as a few commentators like to put it, the start of a rapid, cascading collapse of high tech civilization? And if not, what could a world post-Hormuz look like?

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The beginning of the end

Let me start by stating: the globalized world economy, unable to grow meaningfully for decades now, was on its deathbed already. Sure enough nominal GDP mostly kept growing but largely due to rampant financialization, not due to increases in real material value add. Simply put we hit natural limits to growth, which was never ought to be thought “sustainable.” Over the past decades we ran out of all the easy-to-get minerals, crude oil, wood, fish, topsoil etc., and what remained required a disproportionate increase in energy expenditure to get. Sure, the gross amount of stuff excavated, delivered, built and burned kept growing, but at an ever slower and slower pace.

As a symptom of this crisis world diesel consumption started to plateau around 2014, which meant a plateau in the combined output of mining, agriculture, transportation and construction worldwide. You see, machines performing these jobs didn’t get suddenly more fuel efficient, nor were replaced with electric “alternatives." No, the flattening of diesel production/consumption worldwide was due to a lack of supply increases (when it comes to suitable crude to make diesel fuel from) and due to a lack of demand, as mining (especially coal) and global transportation/construction started to plateau then decline almost everywhere.

Diesel fuel consumption worldwide is already at a high plateau, even as we add more and more unconventional oil and natural gas liquids to the mix. R values represent correlation between diesel consumption growth and increases in world oil supply. The closer this correlation is to 1 the better the match between the two data sets are. Data source: Energy Institute / Chart: own work

The complacency of the 2010’s ended abruptly in 2020. Growth in global trade, too, hit a wall with the onset of the pandemic, then remained flat as shortages, then wars (both on the kinetic and on the economic front) erected new barriers. And since trade, too, was largely powered by diesel fuel and heavy fuel oil, this trend came with a steady decline in fuel consumption. It was, and still is, an uneven decline, though. The reason: war and sanction-induced fuel shortages have led to spikes in the price premium paid over unrefined crude, or diesel crack spreads, which then was followed by a collapse in demand.

Source: TradingView

Now, with the Strait of Hormuz still being effectively closed, and with oil and gas infrastructure being destroyed as we speak, the price premium payed over a barrel of (ever more expensive) Brent crude is breaking every record there is to smash. But is this really the end of the world? Or is this yet another crisis, which will eventually be resolved (although not without leaving a permanent scar on the face of the world economy)? If it’s the latter, what are the potential outcomes, and what could a world post-Hormuz look like?

Source: Deniz Torcu, Adjunct Professor of Globalization, Business and Media, IE University. Originally published at The Conversation

The end of illusions

The war, started by US-Israeli forces almost three weeks ago, has exposed a number of beliefs as myths. The attack on Iran’s South Pars gas field¹ and its Bushehr nuclear power plant, followed by Iran’s retaliation on Gulf refineries and Qatar’s LNG infrastructure—knocking out 17% of their LNG supply for the next three to five years—exposed even more false beliefs, which need to be addressed. So let’s quickly recap what we have learned during the past three weeks before we move on to explore the future beyond the crisis.

1. Myth: Shutting marine traffic through the Strait of Hormuz affects oil and gas trade only. Gulf countries are not just a bunch of oil and gas exporters. One third of global seaborne fertilizer trade, 40 percent of all the world’s helium supply (essential in making chips), 50 to 70 percent of all sulfur (needed in mining and industrial processes), and 9% of global primary aluminum output had to cross the Strait of Hormuz. Prices of these absolutely vital agricultural and industrial inputs have, as a result, spiked to highs not seen since the 2022 global energy crisis, then quickly crashed due to the destructive nature of such supply shortfalls. You see, price spikes often trigger demand destruction (the cancellation of orders) and the sell-off of inventories in anticipation of lower consumption. The disruption of trade in the region will thus have a far reaching, devastating effect on the economy, and not due to oil prices alone but due to a range of physical shortages.

   

   More than just oil. Source: Lloyd’s List

2. Myth: All oil is made equal, and can be replaced. Global shipping, air travel (and cargo!)—besides the machines building, feeding and mining the world—take copious amounts of jet and diesel fuel, as well as heavy fuel oil, to operate. Problem is, that while the medium heavy crude from the now closed Persian Gulf was ideal to make these kinds of fuels from, the same could not be told about fracked US shale oil and all those natural gas liquids. On top of that, a significant portion of the world’s refined diesel fuel (not just crude oil) exports came also from the region, further tightening supply. That is why marine, truck and jet fuels are the hardest products to find an alternative supply for—and hence the $5 diesel prices and record breaking crack spreads above.
   
   What’s worse, crude oil production cuts in the Gulf (resulting from a lack of shipping and storage capacity) affected exactly the grades needed for making these fuels, while leaving lighter Arab crudes flowing through the Red Sea port of Yanbu unscathed (at least until Thursday). Refineries around the world, as a result, are now struggling with a physical lack of essential heavy and medium heavy oil, and are now competing for long-haul alternatives from the Americas and West Africa. This not only adds freight cost and lead time but also a great deal of uncertainty to an already stressed market.

   

   Source: Vortexa, via Naked Capitalism

3. Myth: If the Strait were to be reopened, everything could return to normal within weeks. Far from it: we are not talking about exports alone (that’s already crippled), but extraction itself: meaning, wells must be shut in and plugged, risking damage to the reservoir and greatly complicating the restart of oil production. Consequently, should the strait be reopened tomorrow, oil supply would still take till at least November—if not longer—to restore… (If that’s even possible in places like Iraq, where shutting in ageing fields risks permanently damaging them.) With that said we are still in the opening, rapidly escalating phase of the conflict—a further crippling of Gulf-Arab supplies is definitely in the cards. As Aditya Saraswat, MENA Research Director at Rystad Energy put it recently: “The floor is not fixed – it keeps dropping.” And if Iranian barrels of heavy crude are also eliminated from the market (once the 140 million barrels in ships gets sold) the situation could get worse still.

   

   Source: Rystad Energy research and analysis.

4. Myth: If we have less LNG, we will burn coal instead. Wrong. Take the case of Taiwan, the beating heart of global semiconductor manufacturing, for example. According to data from the Ministry of Economic Affairs’ latest monthly energy report natural gas accounted for 47.8% of electricity generation in 2025, coal 35.4% and renewables 13.1%. Nuclear power made up just 1.1% after the island’s last reactor shut down in May. There is simply no way 30% of their liquefied natural gas—imported from Qatar’s now significantly damaged facilities—could be replaced there… Is it any wonder that China offered natural gas deliveries in exchange for Taiwan’s peaceful reunification with the mainland (which Taiwan then rebuffed)? Oh, and by the way, the same is true for India as well, where natural gas supply was already slashed to industrial users, even though they have plenty of coal to burn. (Singapore, South Korea and Japan, too, are in a similar situation, just sayin.’)
   
   Even more interestingly, and despite the acute natural gas shortage, rising diesel and marine fuel prices will eventually accelerate coal’s ongoing decline. Since transportation was already 40% of coal’s delivered cost, an abrupt rise in trucking and shipping costs will eventually bankrupt coal fired power plants and mines alike (which are also shoveling the black rock with diesel engines). So while on the short run coal fired power plant utilization will surely go up, at least as long as already mined fuel storage lasts, once mining and delivery costs begin to rise electricity output will begin to fall. This means, that industrial output of aluminum, microchips, fertilizer etc. will have to be slashed significantly in these countries, to save both on gas and coal and in order to save households and small businesses from blackouts. Second and third order effects are abound.

5. Myth: Dubai and the rest of the Gulf monarchies are safe places to invest. Well, I guess, that’s no longer the case: the myth that “hosting American troops and bases means protection” has been shattered. The UAE, the prime financial, business, transport and tourism hub—as well as the regions central node for US air operations, surveillance, and intelligence—suffered 1628 drone and 319 missile attacks in the past three weeks. I seriously doubt that trust, seeing the result of those attacks, will return to its previous high mark, for a long-long time—if ever.

6. Myth: Conventional military strength and air power can convince any nation to change their ways. In an age of distributed deterrence, where ultra cheap drones and satellite guided missiles rule the landscape that’s not true anymore. We are witnessing nothing short of an epochal change: something akin to the appearance of horse mounted archers on the eastern boarders of Europe in the 5th century AD—and the acceleration of Roman imperial collapse their visit helped usher in. For an illustration watch these two short videos on Iranian missile cities packed full of munitions and cheap, easy-to-make launchers (read: commercial trucks with specialized superstructures to launch missiles and drones from). These are not billion dollar platforms, but clever and cheap arrows fired from the back of a horse (ahem, truck).

7. Myth: Dollar-based measurements give you an accurate picture of economic / military strength. The utter stupidity of measuring every commodity, economic activity, investment etc. in dollars has now been exposed for the whole world to see. When a $20,000 drone (the cost of a used family car) can destroy a $500,000 radar system or shut down a multi-million dollar refinery causing millions of lost revenue, or when thousands of Patriot missiles have to be expended (costing billions of dollars and years to replace) to fend off cheap, 20-year-old ballistic missiles, comparing military budgets becomes pointless. The US has used 5197 expensive stand-off munitions in the first 96 hours of the fight, generating a replacement bill of $10-16 billion in just 4 days, and burning through years of production. Consider also that replacing these items would cost, first and foremost, minerals and energy—and would take skilled labor, manufacturing capacity and secure supply chains to do. Something, the West no longer has or controls but Iran has ample access to—not only domestically, but also through the China-Iran rail route. This is why destroying launchers could not reduce the number of missiles and drones launched, as those get quickly replaced, unlike the eleven MQ-9 Reaper drones used to observe missile launch activity (shot down by Iranian air defenses).

   Modern warfare has become totally asymmetric. Unblocking the strait can no longer be achieved by sending military escorts into the region, and has nothing to do with de-mining (let alone destroying the Iranian navy and aircraft). Such an operation would require the US to bypass Iranian speedboats (hidden in underground storage and operating at high speeds) and a barrage of missiles and drones in a 30 mile wide waterway. Calling such an attempt a ‘bloodbath’ would be a serious understatement. No wonder that even the most exposed economies and most loyal allies (Japan, Canada) joined somewhat reluctantly… That leaves invading Iran as the only military option,² but that would require hundreds of thousands of soldiers, plus the task of having to deal with one of the most hostile topography Earth has to offer… Oh, and let’s not forget those pesky missiles, drones and the 90 million royally pissed off Iranians. So what then? Nukes?

Ramifications

This assessment leaves us with some pretty uncomfortable conclusions to be drawn. First, there is no military solution to the crisis—not even nukes would do it. Why? Well, such a move, beyond inflicting horrible human suffering, would only serve to make the entire Middle East a desolate wasteland for decades if not centuries to come. You see, there is not much rain there to wash away radioactive dust—so any time wind speeds pick up, radioactive isotopes would start to circulate in the atmosphere again and again—not to mention poisoned water and food (fish) supplies… Iran, in retaliation, however, could still continue hammering the region with missiles from its underground bunkers without any constraint, effectively flattening cities all across the place. Be it as it may, World Health Organization officials are preparing for a nuclear catastrophe if the US-Israel war with Iran escalates further… Food for thought.

So, what could happen when, after a few more rounds of escalations, and the shutting in / damage of even more oil and gas production, the strait remains closed? How could this affair end? Here are some scenarios:

1. Iran collapses and falls apart. The military and government loses control over large amounts of territory, and can no longer pose a threat to shipping or oil infrastructure in the region. Gulf oil production slowly recovers, but never returns to pre-crisis levels. Crude from the region ends up being sold at a discount to compensate for the increased supply risk and insurance costs.

2. The US accepts Iranian terms, quietly abandons its military bases in the Gulf and removes all sanctions. The power vacuum attracts other major powers to guarantee safety in the region. Gulf oil production slowly recovers, but never returns to pre-crisis levels. Crude from the region ends up being sold at a discount to compensate for the increased supply risk and insurance costs.

3. Long war, with boots on the ground. Escalation continues, US special troops infiltrate Iran from Pakistan and Azerbaijan with the aim of killing IRGC leaders, taking over (read: blowing up) missile cities and uranium stockpiles. High casualties and (very) limited success leads to political backlash at home, while leaving oil and gas infrastructure across the region permanently damaged and the strait closed.

4. The US declares victory and sails away, as it’s missile stockpiles fall below a critical level. Ceasefire and peace deals are never signed, but some concessions are given (such as military bases being abandoned in the region). Missile exchanges fall to a manageable level as Israel threatens to resort to what it calls the ‘Samson option.’ Oil extraction and shipping largely remains blocked (especially for Western nations), but individual countries (like Pakistan and India) manage to strike deals with Iran to allow regular shipments of oil to go through the Strait of Hormuz. Gulf oil exports stabilize well below 50% of their original value. LNG exports from Qatar never recover to their February, 2026 levels.

Sometimes I wonder what games these leaders played as children. Image via Unsplash

Independent of which scenario prevails (I think it will be #3 morphing into #4 over the months / years ahead) if the strait doesn’t get unblocked and oil production is not restored within a few months (which seems rather unlikely), the following chain of events has an increasing likelihood of coming true (not necessarily in this order or magnitude, but somewhere along these lines):

1. Due to a physical lack of oil (especially diesel and maritime fuels and LNG), economic activity in Korea, Japan, India, Australia and many other Asian countries slowly grinds to a halt over the spring and summer. Plants shut down production of fertilizers, microchips, aluminum, cars, electronics etc. Mines in Australia stop producing iron ore, bauxite, lithium and coal.

2. Global shipping seizes up, further exacerbating the problem. Containers end up being stuck in the wrong port en masse. Transportation costs skyrocket, straining business and consumer budgets alike. Food prices begin to climb.

3. Shortages of parts and raw materials ripple through supply chains, and cause manufacturing plant shutdowns in Europe and all across the world, adding insult to injury caused by rising energy prices. China, thanks to its large safety stocks and integrated supply chains doesn’t suffer as much, but still loses significant revenue due to falling exports.

4. A wave of business bankruptcies from airlines to car manufacturers, pubs to small businesses begin. Unemployment starts to rise sharply.

5. Summer harvests come in poor due to a lack of fertilizer applied in the spring, especially in sub-Saharan Africa and Pakistan, causing riots there, and a massive food inflation elsewhere.

6. Global demand for oil collapses below supply, thanks to falling industrial and transportation activity, causing oil prices to sink below $60.

7. Financial markets rattle, private credit seizes up. The global economy enters a steep recession, eventually wiping out 10-15% of global GDP.

While the above scenario might sound pessimistic, I don’t expect the world economy to go through a complete, cascading collapse either. Demand destruction, finding alternative suppliers, and (another) permanent drop in living standards in wealthy nations will eventually do the job of stopping the crisis from propagating further. This is not to say that the world will eventually return to “normal” once the Hormuz situation is resolved. According to the World Health Organization there are 363 million people at risk of acute hunger already, 45 million of which due to the crisis in (and a lack of fertilizer from) the Middle East. That is a massive human toll, already, and we haven’t even touched upon the economic consequences.

Epilogue

We are witnessing epochal change, not only in warfare and world politics, but on a civilizational level, too. The world beyond the Iran War will be a profoundly different place. The US will no longer be the sole, unchallenged military-economic hegemon. Having depleted its missile and high-end weapons stockpiles in Ukraine and in Iran, it could no longer pose a credible threat to China—beyond intimidating its rivals with its vast nuclear stockpiles. Financially, the world will eventually move away from the dollar, but not day one after hostilities end. World oil supply would be permanently decreased, and petroleum production would never return to February, 2026 levels, as all major producers now face a terminal downturn in production. The world economy enters a stepwise decline, with the Iran-crisis induced depression being just the first of many drops in economic output to come. I wish I could end on a more cheerful note but, like it or not, that’s what ahead of us: neither an instant collapse, nor a return to normal.

In case you wondered, this is what the fall of civilizations looks like from the inside.

Until next time,

B

Thank you for reading The Honest Sorcerer. If you value this article or any others please share and consider a subscription, or perhaps buying a virtual coffee. At the same time allow me to express my eternal gratitude to those who already support my work — without you this site could not exist.

1. South Pars is more than a gas field and it affects markets beyond gas. It is the central hub keeping Iran’s oilfields alive, the feedstock source for Asia’s petrochemical industry, and the fuel supply behind the majority of Iran’s electricity grid. No wonder Iran has struck a 55 billion cubic meter gas deal with Russia back in April, 2025 as a backup. (Beyond natural gas, though, Russia can also supply Iran with food, drones, air defense and other necessities through the Caspian Sea.)

2. According to a senior Washington-based source “who works closely with the U.S. Treasury Department:”“He [Trump] does not want to put men on the ground around the Strait, which would be the only realistic option to try to ensure safe passage for ships. Without that, deploying navy ships to escort merchant ships through the Strait would still be subject to drones and missiles launched from elsewhere in Iran, and to the IRGC’s [Islamic Revolutionary Guard Corps] fast attack boats, and even before that, the U.S. Navy would have to de-mine the area now as well.”