Oil War II
Responses to the American-Israeli war on Iran
The second in a series of responses to the American-Israeli war on Iran, from Kate Mackenzie and Patrick Bigger and Kevin Cashman. You can read Part I of the series here.
Demand Destruction
By Kate Mackenzie
The effective closure of the Strait of Hormuz raises a prospect that has only been gamed out theoretically: of a material portion of the world’s fossil energy supply (and its fertilizers and feedstocks) being blocked, with no adequate route to market.
That high oil prices benefit anyone in the business of selling oil—assuming they can get their product to market—is a given. Oil companies stand to make an additional $63 billion this year if prices average $100/bbl for 2026, according to energy consultancy Rystad. This huge windfall obscures the fact that a “sustained” period of high prices is a nightmare for many oil producing interests. Oil prices that remain too high for too long are uncomfortable even for commercial producers, and can pose an almost existential threat to sovereign producers.
Not all countries that sell oil are equally vulnerable. The spectre looms largest for the sovereign producers that are most dependent on oil export income. Poorer petrostates are usually too constrained to plan for the future, which is why countries like Angola and Ecuador quit OPEC+ as they chafed under its requirements to cut production. Wealthier petrostates can afford to think about the long-term.
“Demand destruction”, in which prices remain so high that some users quit oil altogether, haunts Saudi Arabia in particular. Despite the country’s crude oil being the cheapest in the world to extract, it needs a “fiscal breakeven” price well above the profit levels required by oil companies or other countries. Oil rents underwrite Saudi Arabia’s social contract with its citizens, who enjoy well paid jobs and a high standard of living to compensate for a lack of say in their governance. Saudi Arabia’s bigger population and resulting lower per capita oil revenue puts it at a disadvantage compared with fellow wealthy petrostates such as the UAE and Norway. Saudi has not built sufficient alternative sources of income to significantly cut its reliance on oil exports.
The kingdom’s former oil minister, the late Ahmed Zaki Yamani, either originated or popularized the adage that “the stone age didn’t end because we ran out of stones”. Yamani held the ministerial position from 1962 to 1986, through the oil embargo of 1972-73 and the oil crisis of 1979. The first incident heralded the formation of the OPEC group of countries that built enormous wealth for its members, particularly those in the Gulf. But the combined oil price shocks of the 1970s rocked the ability of their customers in oil-consuming countries to maintain their habit.
Saudi Arabia has long maintained a volume of spare capacity, a result not just of its attempts to keep prices high, but also as a demonstrable means to reduce them if they threatened to go high enough to harm demand. This latter function became particularly important after the price run-up in 2007 leading to an all-time high for West Texas Intermediate of $147 in July 2008, which exacerbated recessions arising from the global financial crisis.
Later in 2008, prices fell well below $40 per barrel, but the experience left both importing and exporting countries anxious; a widely cited paper by James Hamilton at Brookings Institution partly attributed the US recession of the late 2000s, which actually began in 2007, to the run-up in oil prices. Even though macroeconomists have tended to argue that oil prices have played a smaller role in economic activity since the shocks of the 1970s, there is little dispute that high and volatile prices can provoke recessions, which in turn hurts oil demand.
No-one wanted a repeat of those mid-2008 highs. In the aftermath, Saudi authorities insisted that they could, relatively easily, ramp up production if prices threatened to get too high. Increasingly, they also specified a price window which included a ceiling. Oil minister Ali al-Naimi said in September 2009 that the current price was “good for everybody, consumers and producers.” Around the same time King Abdullah of Saudi Arabia gave a newspaper interview declaring $75 a price he considered to be “fair”; which he reiterated later in the year, saying $75 - 80 was “a fair price”.
While oil producers were effectively advocating for a price ceiling, leaders of the world’s biggest oil-importing countries were voicing support for a price floor. Gordon Brown and Nicholas Sarkozy in a 2009 Wall Street Journal editorial publicly called for a price range that would be high enough to support investment in oil production. “We as consumers must recognize that abnormally low oil prices, while giving short-term benefits, do long-term damage,” they wrote, adding that low prices disincentive investment in oil production (inexplicably, they asserted that it also hurt investment in “energy savings and carbon free alternatives”).
This kind of rhetoric over price ranges has evolved as the fine supply-demand balance has shifted towards oversupply. This is in part due to the US shale boom of the 2010s which, along with the actions of Russia and the more cash-strapped of the traditional OPEC members, shifted the balance of power towards producers with less interest in the long-term stability of the oil market. Throughout this, Saudi Arabia has maintained and even increased its spare capacity, which was approaching 3 million barrels per day prior to the US and Israel attacking Iran.
The aftermath of more sustained price shocks, however, remains in the psyche of the major oil producers. The 1979 shock, sparked by a collapse in Iranian and, later, Iraqi production, sent many oil-importing countries into recession. Consequently, oil consumption fell more than 10 percent in the four years to 1983. As the experience demonstrates, if prices stay too high for too long countries can and will cut their consumption in ways that can be enduring.
The self-inflicted effects are most memorable. “For the Arab OPEC states, the ‘success’ of the embargo proved somewhat pyrrhic and fleeting,”, wrote Frank Verrastro and Guy Caruso of the Center for Strategic and International Studies in 2013, in reference to the 1973 oil embargo, “as the price and disruption shock spurred new government policies and investments in energy efficiency, including the adoption of fuel efficiency standards for cars (CAFE), research into and the accelerated deployment of alternative fuels, and in the United States, the eventual removal, beginning in 1979, of oil price controls.”
The combined price shocks of the 1970s also led Japan and France, two of the most oil-dependent OECD countries, to build their nuclear fleets. Many countries introduced energy market legislation; in Japan, these powers remain and almost the entire industrial sector and almost half of the commercial sector are required to maintain energy efficiency plans.
The sellers of oil now face a new type of existential problem. Oil producing companies and countries alike have been at pains to downplay the prospect of transport electrification and other developments that render oil unnecessary. As evidence of continued increase in oil demand they have held the recent decision by the International Energy Agency to resume publication of its “Current Policies Scenario” in its annual long-term energy outlook. The IEA’s scenario modelling famously underestimates clean energy deployment and the CPS scenario also assumes that even announced energy policies won’t be implemented.
The reality looks less rosy. If non-gas liquids such as butane and ethane are excluded, crude oil production peaked in 2018, while on the consumption side, a significant but unknown amount of oil purchased in recent years has been poured into China’s strategic petroleum reserve. Bloomberg New Energy Finance estimates that electric passenger vehicles already cut oil demand by 1.5 million barrels a day in 2023 and sales of internal combustion engine cars peaked in 2018. Countries that have been subsidising diesel and gasoline consumption, such as Indonesia, will face immense fiscal strain if prices remain high. About 45 per cent of crude oil consumed worldwide is used for road transport, much of which is increasingly cheap to electrify.
Around the world—especially in Asia—emergency measures have been enacted to cut oil and gas consumption. Some, such as 4-day working weeks in the Philippines and work-from-home rules for Thai civil servants, could easily be reversed. Others will be difficult not to sustain. Declines in demand for gas-guzzlers might lead to more permanent shifts in already-fragile western car manufacturers, especially when—in countries outside the US at least—Chinese EVs are increasingly available at sub-$10,000 prices.
A subtle shift in OPEC+ countries has already begun to take place in the last few years. Saudi Arabia has moved away from its “oil for security” stance towards the US as it became a less reliable partner. The country has established regional and Asian ties, and it has rebuilt diplomatic ties with Iran, brokered by China, becoming a “dialogue member” of China’s Shanghai Cooperation Organization. The US is now too unpredictable a partner.
Meanwhile, the UAE—the second-most powerful Gulf producer in OPEC—has taken a different path. As Ziad Dauod, chief emerging markets economist at Bloomberg, said in 2024:
[The UAE] is pushing for its OPEC quota to increase and it wants to produce more today so that it doesn't end up with stranded assets when oil prices drop in the future. Saudi Arabia is the other sort of end of the spectrum where it has large funding needs, which requires it to have a high oil price.
Since then, Saudi Arabia has largely abandoned its stance and agreed to increase production even into a market that was looking oversupplied. The closure of the Strait of Hormuz will almost certainly be another long-term blow for petrostates, even when they can get to market.
Kate Mackenzie is a researcher and writer on climate, energy and finance. She is a former Financial Times journalist, a founding contributor to Bloomberg Green, and a regular contributor to Heatmap. She co-edits The Polycrisis newsletter and is an adjunct fellow at Macquarie University and a fellow at Australia’s Centre for Policy Development.
The Omnicidal Fossil Empire goes to Iran
By Patrick Bigger and Kevin Cashman
The US and Israel’s attack on Iran has been framed as a defensive military action with shifting but short-term goals: perhaps, we hear, it’s about protecting the US from an Iranian nuclear threat; or keeping Israel safe from an imminent ballistic missile attack. Perhaps it is something else entirely. This may be incoherent and false, but the consequences are real. Market chaos reigns as insurers effectively close the Strait of Hormuz. Fossil energy prices are skyrocketing. A new refugee crisis is threatening to erupt from Damascus to Tehran. Rockets are falling from Cyprus to Oman. At least 1,300 civilians have so far been killed by the joint US/Israeli assault, as nightmarish black rain falls on Tehran. These are grim effects indeed, which will only get worse.
Longer-term, the attack will reinforce the power of fossil‑fuel interests, destabilize energy markets, and lock in new rounds of extraction and militarization that enrich the chosen beneficiaries of the Trump administration’s oil-war-artificial intelligence industrial strategy. And because fossil energy is, for now, still the foundation of the global economy, the shockwaves will land hardest on working‑class people who are already navigating an affordability crisis.
The logic of the attack is neither defensive nor limited. In one of the first plausible explanations of why the US decided to attack Iran, Trump regime mouthpiece K.T. MacFarland wrote on the 10th day of the offensive, in response to right-wing critics that the war wasn’t America First or MAGA. “It is the final piece of a strategy that consolidates America’s dominance over the global energy supply.” Leaving aside the obvious point that, as many countries move decisively towards renewables, the US cannot maintain control of global energy, it is at least internally consistent with foreign policy of the administration.
The attack on Iran comes on the heels of: the brazen kidnapping of Nicolas Maduro, which opened up Venezuelan oil production to US firms, something Chevron is already acting on despite the suggestions that US firms would be reticent to invest in an erratic oil supply; the underreported bombing campaigns in the oil-producing countries of Nigeria and Ecuador, on top of the extrajudicial murder of sailors in the Caribbean; Pentagon subsidies extending the life of coal mines; and aggressive foreign policy towards countries from Greenland to Democratic Republic of Congo to secure access to the “critical minerals” required for everything from solar panels to the guidance kits Israel attaches to 2,000-pound bombs in their slaughter of Palestinians. All of these have happened in the past 6 months alone.
All of which is to say: the war on Iran is part and parcel of the US’s omnicidal “energy dominance” agenda, turbocharging the climate crisis today while rooted in the long‑standing architecture of a fossil‑fuelled empire. This geopolitical order is built on securing carbon flows, disciplining regions central to global energy markets and maintaining the political economy of “crude capitalism” through force, all in the interests of keeping fossil assets operable and profitable. The fact that these currents coincide in Iran is a tidy bit of symmetry. Its effects, however, are anything but tidy.
Within hours of the attack, oil and natural gas prices rose sharply, and remain elevated and volatile. As long as the Strait of Hormuz remains closed, or even threatened, markets will price in risk, which is then passed on to households from suburban Dallas to rural Tanzania.
This dynamic operates across distinct temporalities. First there is the price spike; then there is what profiteers do with the windfall. As Gregor Semieniuk and his colleagues have shown, crises like this quickly become opportunities for firms with concentrated market power to raise prices far beyond their own cost increases, in line with what Isabella Weber describes as “seller’s inflation”: a process in which dominant firms use the narrative of crisis to widen margins, justify price hikes, and restructure markets to their advantage.
In 2022, Semieniuk and his co-authors found that US-owned fossil fuel companies recorded over $300 billion in profits—a sevenfold increase over the 2016–2019 average—despite no corresponding rise in production costs. The profits were not the result of scarcity; they were the result of pricing power exercised under the cover of geopolitical instability. As the Transition Security Project recently demonstrated, Europe’s failure to break from fossil energy after this shock has cost, in a conservative estimate, $1.8 trillion. These costs were driven by a shift towards “molecules of US freedom”— liquefiednatural gas (LNG) from the United States—and away from pipeline gas from Russia, part of the US and European effort to starve the Russian government of oil and gas revenue. Additional analysis suggests that the profits continued to flow back to the US after 2022.
It is worth taking stock of this from a European perspective. Europe is now dependent on carbon intensive US LNG, making it more vulnerable to global price shocks and more exposed to US economic pressure. At the same time, it is spending trillions more on energy, with a large share of that money flowing to US companies and, ultimately, to wealthy Americans. Meanwhile, the strategic goal of depriving the Russian government of oil and gas revenue has largely failed; while Russian petroleum exports have been redirected away from Europe and Western trade and financial centres, other willing buyers remain. Ironically, Russian oil and gas may yet serve as a stopgap as the Trump administration tries to contain the supply disruptions roiling the global economy from its new war of choice in the Middle East.
Thus, Europe is poorer, less secure, and more deeply exposed to US interests. Difficult questions follow. Could the Russian invasion of Ukraine—and the 2022 energy shock that followed—have been avoided? Did the US have an interest in escalation instead of diplomacy? And, as the world begins to pay for the next US war, will Europe learn from the last shock, or will it pay for this one too, and perhaps the one after that?
These are pressing questions, given that the U.S. is acting within a geopolitical order largely built around fossil energy, where military force is deployed to secure the conditions under which carbon can continue to circulate. The attack on Iran sets the stage for a similar cycle. With supply routes disrupted and risk premia rising to the point where Trump is offering to use the US Export/Import Bank as a reinsurer of last resort, fossil majors can once again present themselves as reluctant beneficiaries of global turmoil while capturing extraordinary rents. These windfalls then become the financial foundation for new exploration and production (plus dividends to shareholders), as they have been from every oil boom of the last 50 years.
New production then serves to lock in future emissions, extending the lifespan of extractive infrastructure in the absence of strong regulation or a credible plan to transition away from fossil fuels in the economies that are most dependent on them.
Even before the effects that price shocks and extraction lock‑in, war itself is a carbon‑intensive enterprise. The U.S. military is the single largest institutional consumer of fossil fuels in the world. If the US military were a country, its emissions would be on a par with medium-sized countries like Portugal or Sweden. Every Tomahawk missile emits 20 tons of CO2 equivalent greenhouse gases, more than the average American emits in a year.
Military spending also crowds out other forms of public investment, and the opportunity cost is immense. The current operation has already cost the US $11 billion dollars in the first week of the attack, a cost that will have to be tacked onto the Pentagon’s obscene $1 trillion budget—roughly 2.5 times more than the US put into the energy transition in 2024. This problem will compound itself in Europe, where governments have rolled over at Trump’s demand that NATO countries raise military spending no matter the cuts that have to be made elsewhere.
Yet the most significant climate impact of the attack on Iran will not be the emissions of the conflict itself, but from its aftermath. When energy prices have spiked in the past due to US military interventions, the US government has responded by expanding fossil‑fuel production under the banner of “energy security” or, now, “energy dominance.” In addition to the emissions that will be generated in clearing rubble and then rebuilding—the biggest cause of emissions in any war—new drilling leases are likely to be issued, LNG terminals will be fast‑tracked and permitting rules loosened in the name of increasing supply. These decisions create long‑lived assets, locking in emissions for decades.
Once these dynamics are clear, the affordability crisis comes into sharper focus. Energy price spikes function as a regressive tax, hitting lower‑income households hardest. Higher fuel prices raise the cost of commuting, heating and electricity. But the more significant effect is indirect: when energy becomes more expensive, everything that depends on energy becomes more expensive. Food is the clearest example. With petrochemical fertilizer flows disrupted, agricultural input and transportation costs will rise, and those increases will work their way through global food systems over the next year. The poorest households that spend a larger share of income on food will feel it most acutely.
Inflationary pressures in turn justify restrictive monetary policy, which slows investment, raises unemployment risk and justifies austerity. Climate investments are delayed or downsized and social programs go unfunded. The political right then capitalizes on public frustration, framing inflation as a failure of government rather than a predictable outcome of corporate pricing power, inflationary military spending and geopolitical instability that the Trump administration created.
If crisis is a profit engine for fossil capital, then stability is a precondition for a just transition. That requires demilitarization, public investment and a political economy that treats energy as a public good not a commodity. It requires confronting the pricing power of fossil‑fuel firms and building institutions capable of managing key sectors in the public interest.
Security cannot be achieved through force projection in the Gulf. But in the meantime, the people of Iran and working-class communities across the world will continue to suffer the consequences of US fossil energy dominance.
Patrick Bigger is the Interim Executive Director of the Climate and Community Institute and the Co-Director of the Transition Security Project. His writing on US empire and the climate crisis has featured in publications from Science to Jacobin.
Kevin Cashman is an economist and a researcher at the Transition Security Project. He writes on the international financial system, US foreign policy and global economic governance.
