The Price of Hormuz: Geopolitical Scenarios and Global Impact

The prevailing view is that the U.S. has lost control of the situation in the Persian Gulf. And it is certainly true that Iran has gained a powerful trump card – the ability to threaten shipping in the strait – that it did not have before.

In this sense, the balance of power in relations with the U.S. has shifted in Iran’s favor. This shift, along with a retaliatory U.S. blockade of Iran-related shipping, suggests four possible scenarios: China mediates a lasting peace; Iran descends into chaos; the U.S. withdraws from the region entirely; and some confused version of the status quo persists.

The good news for US President Donald Trump is that he still holds the initiative and can probably choose the scenario he prefers. But Trump still has a serious problem as he has three main goals: to roll back Iran’s nuclear program, to permanently open the Strait, and to avoid becoming a president who will be accused of “losing” Taiwan to China. The bad news for Trump is that he can accomplish at most two of these goals.

China’s favorable strategy

After his recent summit with Chinese leader Xi Jinping, Trump apparently hopes that China’s involvement in Gulf affairs will go beyond its current behind-the-scenes role. China could certainly help broker a peace agreement that would resolve perhaps the most important issue for the U.S. – Iran’s nuclear program – while also securing what Iran wants most: massive infrastructure investment (and an end to bombing).

Unfortunately, after the Trump and Xi summit, it is becoming increasingly clear that the price of China’s participation will be high. While China imports more than 11 million barrels of oil a day – and therefore has an interest in lower crude prices – it has significant reserves and seems confident that it can sustain oil prices near current levels. China has also been buying about a quarter of its liquefied natural gas from Qatar, where production remains severely constrained by ongoing fighting and significant infrastructure damage.

But overall, the prospect of China gaining control of Taiwan looks very real. The Chinese leadership will seek a series of concessions from the United States while trying to convince the Taiwanese that they would be better off with China. China’s optimal strategy is to be helpful but not let the U.S. off the hook too quickly. U.S. global weakness helps demonstrate China’s regional strength.

Trump’s tough choices

In the second scenario, Trump launches further strikes, either selective (e.g., on Iran’s land export routes) or widespread (as he has threatened several times).

No one doubts the U.S. military’s ability to kill a lot of people and destroy bridges, roads, and buildings. But while this strategy may make Iran ungovernable, it will not end armed resistance.

Keep in mind that the main threat to the Strait of Hormuz comes from inexpensive and easy to operate drones. If Iran splits into warring factions, will that reduce or increase the threat to the Strait? If some version of the drone threat persists, will oil tankers (and their crews and insurers) be willing to pass through the Strait?

The level of violence required to restrict tanker traffic is low – the outcome depends on the credibility of the threat. In this scenario, the Strait is not permanently open, the conflict is likely to cause significant damage to Iran’s Persian Gulf neighbors, and chronic regional instability worsens the situation for virtually everyone.

In the third scenario, also predicted by Trump, the U.S. washes its hands of the situation by suggesting that the Gulf states, the European Union, or someone else take over. This could well lead to the reopening of the Strait, but most likely on terms agreed to by Iran and China.

For the U.S., this scenario means zero progress on Iran’s nuclear program, making the war worse than pointless: Iran gains de facto control of the Strait, and the U.S. walks away empty-handed. It will be very difficult for the White House to present this story as a victory.

No war, no peace

This brings us to the most likely short-term scenario: an unsustainable truce that is periodically broken. When the US behaves in a less confrontational manner, ships can pass through the strait. But if the U.S. strikes, Iran can proportionately block traffic.

Periods of mutual rapprochement and reduced tensions could ease pressure on global prices for oil, natural gas, plastics and fertilizer, potentially creating room for limited confidence-building measures and, in time, a resumption of nuclear negotiations.

But it’s a narrow path on a fragile cliff – a path that could collapse at any moment before a final agreement is reached. And while the Trump administration may argue that nuclear issues are now on a “separate track,” the U.S. would make no progress on that front.

In all of this, Russia would be a major winner and potential destroyer. With rising oil prices and the suspension of U.S. sanctions against the Russian oil industry, President Vladimir Putin now has the hard currency needed to finance his war with Ukraine. Putin wants the Americans to get bogged down, repeatedly get into embarrassing situations and feel the need to allow maximum exports of Russian oil.

Under all possible scenarios, we should expect Russia to supply drones and missiles to Iranian forces – a very lucrative business model for the Kremlin.

Whether Trump turns to transactional Xi, risks broader regional collapse, or settles for a precarious equilibrium, the era of implicit and unchallenged U.S. control over the Persian Gulf is over. Instead, a more complex and fragmented regional balance is likely to emerge, with the Strait of Hormuz remaining only conditionally open, with significant implications for global economic stability.

Simon Johnson

Simon Johnson, winner of the Nobel Prize in Economics 2024 and former chief economist of the International Monetary Fund, is a professor at the MIT SloanSchool of Management , co-director of the Ston Center on Inequality and the Shaping the Future of Work initiative at MIT, co-chair of the CFA Institute’s Systemic Risk Council, and an ambassador for artificial intelligence in the UK.

Amir Kermani

Amir Kermani, professor of finance and real estate at the Haas School of Business at the University of California, Berkeley, is a research associate at the National Bureau of Economic Research.