The American-Israeli war on Iran has spiked oil prices, as tankers hesitate to transit the Strait of Hormuz, a narrow waterway connecting the Persian Gulf to the Indian Ocean through which some 20% of global oil trade passes.
To keep oil flowing from the region, President Trump has promised US naval protection to ships travelling through the strait, if necessary.
This is not a new idea but a continuation of President Jimmy Carter’s 1980 pledge to defend the Persian Gulf after the 1979 Islamic Revolution, which, compounded by the Soviet invasion of Afghanistan, heightened threats to the global oil supply.
Carter’s commitment led to the creation of CENTCOM, the US Central Command, and became the driving rationale for a permanent US footprint in the region.
But long-term US military basing has failed to stop Iran from attacking Gulf shipping, even as it has discouraged investment in a more robust global oil transportation network, setting the stage for today’s oil price spike worries. As the Iran crisis plays out, the US has better options than doubling down on Carter’s approach. But they require understanding and correcting America’s unique vulnerability: The country is more exposed to oil price shocks than any other major power, including China.
Many Americans might be surprised to hear this. The US is the world’s largest oil producer and a net petroleum exporter. But oil trades in a global market at a single price. Experts compare the oil market to a giant bathtub with many spigots and drains.
The total level of oil in the bathtub — plus market speculation about whether that level will go up or down — determines the price, even for countries such as the US that pour a lot of crude into the tub.
Every country that draws from the bathtub suffers from price shocks, but the US suffers more than its peers. The US economy has a high oil intensity: it consumes a lot of oil to produce each dollar of gross domestic product.
America’s economy is more than 40% more oil-intensive than China’s, even though China is a net oil importer and sources much of its oil from Persian Gulf countries, including Iran. The European Union’s economy is half as oil-intensive as America’s. Even Russia, a petrostate, is about 20% less reliant on oil per unit of economic output than the US.
China is still a developing country in many ways, and developing economies tend to consume more oil than fully industrialised ones. But China recognised its strategic vulnerability to oil shocks years ago and has been methodically reducing it — not with warships but with electric vehicles and high-speed electric rail.
Chinese gasoline consumption appears to have peaked in 2023, far earlier than analysts expected. According to an analysis by BloombergNEF, about two-thirds of all electric vehicles sold worldwide are purchased in China. Within the next year, China’s EV sales are projected to exceed the entire US car market.
The US oil-intensity problem is set to worsen relative to China. The Trump administration has ended EV subsidies, discouraged investment in charging infrastructure and weakened US fuel economy standards.
The International Energy Agency has revised projections of American EV adoption sharply downward to about 20% of new US car sales by 2030, compared with more than 40% under previous policies. That figure is expected to be around 80% in China.
So what should Washington do right now? In the short term, the US government can reassure markets by releasing oil from the Strategic Petroleum Reserve, which was built for moments like this. The reserve currently holds about 415 million barrels and can begin deliveries within two weeks.
The White House should have planned for an emergency drawdown before launching a reckless war on Iran. Promising US military intervention to protect Persian Gulf oil, as Carter did, sends a bad signal. It encourages the oil market to over-rely on a single, vulnerable choke point — the Strait of Hormuz — for petroleum commerce.
If that had not happened, oil companies and governments might have had more reason to diversify the routes through which Middle East oil moves — through pipelines or railways to ports on the Mediterranean or Red Sea.
Over the long run, the US needs to do what China is already doing: invest in EVs.
The New York Times