Michael Roberts: Trump’s Hobson’s choice

Trump’s Hobson’s choice

by Michael Roberts

Today the crude oil topped $95 per barrel, despite the International Energy Agency (IEA) approving its largest-ever release of emergency oil reserves, with member states set to release 400 million barrels. That had little effect on the oil price because Iraq had to halt operations at its oil terminals after two oil tankers were targeted in Iraqi waters. The Strait of Hormuz also remains effectively shut, with several commercial vessels reportedly struck off the coast of Iran. That has prompted major Middle Eastern producers to curb output, tightening global supply further. The Iranian government says that the US must guarantee that neither it nor Israel will strike the country in the future for a ceasefire to be considered. 

So the war in Iran is not going well for Donald Trump.  His ‘war of choice’ (ie unbridled aggression) has become a Hobson’s choice.  His ‘plan’ to decapitate the Iranian leadership with some quick bombing and so achieve regime change along the lines of the ‘Venezuelan solution’ did not happen.  Iran is not Venezuela.  It is a huge country with over 90m people and with a state armed to the teeth with weaponry to defend itself.  For the Iranian mullah-controlled regime this is an existential struggle. 

The hope that Trump had for an uprising by the Iranian people against the regime has not materialised.  The regime is hated by the majority and only recently killed upwards of 30,000 people who protested against the regime.  But when bombs are raining down on the heads of people, they are in no position to come on the streets.  Moreover, any such protest would be viciously suppressed by the regime, which so far has not split and seems united in continuing to resist.

So now it’s Hobson choice for Trump.  Either he calls a ‘victory’ and gets a ceasefire with the regime intact or he doubles down with the possible use of ground troops and yet more bombing in order to try and bring down the regime by sheer military might.  But that could mean many Americans dying. The Israelis don’t want to stop. They want to reduce Iran to the condition of Gaza if they can. But they need US funding and weaponry and they also face dangerous missile attacks from Iran and from Hezbollah in Lebanon.

Either way, having launched a war that a majority of Americans oppose (according to opinion polls), Trump and his acolytes are facing defeat in the mid-term congressional elections.  Congress, as controlled by Trump’s Republicans, has done nothing to stop this war, illegal under the US constitution. A Democrat Congress cannot be guaranteed to rein in Trump either, but at least it might block funding for the war and stop other Trump economic policies.

And this war is costing the American state over $1bn a day.  Sure, the Trump administration has dramatically increased the ‘defence’ budget to over $1trn a year, but even after just two weeks, the war is using up a sizeable part of the weaponry and logistics available. This is squeezing what is required to continue the Ukraine war as a result.  Already Ukraine’s President Zelenskyy is complaining of the lack of funding and arms that he needs to sustain the frontline against the Russians.

But it is not just the cost of the war to America’s budget, much more worrying is the impact on energy prices and eventually the global economy.  As I argued in a previous post, oil and gas prices would rise to astronomical levels only if two things happened:  first, if the Strait of Hormuz, a key choke point for shipping traffic, was blocked; and second, if the oil production and distribution facilities in the Gulf states, Saudi Arabia and Iran were destroyed. 

So far, the former is in place. Just the threat of attacking tankers in the Strait has stopped movement, while shipping insurance premiums have rocketed, pricing out many shipping. And to avoid destruction, many Gulf states have closed down production facilities.  So despite claims by Trump that ships will be escorted through the Strait by the US navy and that the Iranian regime is ‘almost completely’ defeated, the massive swings in oil and gas prices continue and stay well above pre-war levels.

What might all this mean for the world economy? That depends on what happens to the shipments of oil and gas from the region and the scale of long-term damage to oil and gas facilities. If a ceasefire is achieved within the next week, there would still be a fall in world oil and gas exports, but not serious enough to keep energy prices at current high levels. But if the conflict goes on for months, energy exports could fall 5-6% which would keep prices some 10-20% above pre-war levels.  And if oil and gas installations were permanently damaged or out of operation for a long time, then oil prices could reach $150/b or nearly three times pre-war levels and natural gas prices would rocket to €120 mwh, or four times the pre-war rate.  According to Capital Economics, such a rise would be comparable to the global supply shock of the late 1970s, which contributed to high inflation and global recession. But it may not be that bad as the major economies are much less dependent on oil and gas than in the 1970s, thanks to the move to renewable energy and a general improvement in energy efficiency.  

Even so, if a long war ensues, it will intensify the existing trend in the major economies towards ‘stagflation’ i.e. rising price inflation and unemployment alongside falling economic growth. According to the Royal Bank of Canada economists, US consumer price inflation would surge to 3.7% from a current 2.4% yoy, if oil prices hold at $100 a barrel.  The US economy shed 92,000 jobs in February and the unemployment rate climbed to 4.4 per cent. And that was after a 2025 marked by the weakest average monthly job increases outside a recession in more than two decades.  The Iran war will only increase unemployment even more.

Europe’s inflation would also spiral if natural gas prices stay at current levels.  And inflation would rise significantly in the East Asia economies and India.  World economic growth would weather a 10% lift in energy prices, according to the International Monetary Fund, and only slow from about a currently projected 3.2% for this year to 3%. The UK and the euro area would each grow by just 1% or less.  

But if oil prices stay above $100/b, the damage would be much greater. For example, Société Générale, estimated that every $10 sustained increase in oil prices would widen India’s current account deficit, currently around 1 per cent of GDP, by half a percentage point and would cut economic growth by 0.3 per cent.  At $100/b, that would mean a current deficit of 3% of GDP and a reduction in economic growth from a 2026 forecast of 6.4% to 5%. And at such an oil price level, it could cut US real GDP growth by 0.8% points (i.e. from 2% a year to near 1%) and US inflation could reach 4% a year. 

This would pose a serious dilemma for central banks.  Should they raise their policy interest rates to try and curb inflation or just see the inflation spike through rather than damage economic growth?  Hiking rates could trigger the bursting of the AI bubble that is still coming.

Either way, households across the globe, in the economies of the Global North and of the Global South, would face rising prices and borrowing costs and/or falling employment and incomes.  It will be Hobson’s choice for them as well as Trump.