Hormuz doesn’t need to close to make everything more expensive

Iran does not need to block the strait to do damage; it is enough that crossing it is expensive, slow and uncertain. The cost of insuring a tanker has risen as much as fortyfold, freight rates have quintupled and diesel trades at almost twice the price of crude, while the Fed and the ECB raise rates against an inflation rate half of which, according to the IMF, is pure fear. Every unverified statement from the Revolutionary Guard makes insurance, freight and diesel more expensive. Central banks respond by raising rates, but no interest rate gets a single extra barrel out of Hormuz.

On Thursday, Iran’s Revolutionary Guard announced that it had struck seven vessels near the Strait of Hormuz. Four had supposedly caught fire while transferring crude from one ship to another, and the other three had allegedly hit mines. Trump replied that it was a set-up to push up oil prices before the 3 November elections, and no independent maritime authority has confirmed most of those attacks. It makes no difference. Brent rose 4% that day, to $113, and by Friday it was already trading at $114.

Iran has discovered that it does not need to close Hormuz to do damage. It is enough that passing through it is expensive, slow and uncertain. The cost of that uncertainty is not paid by the generals in Tehran; it is paid by the haulier filling his lorry’s tank and by the family watching the price of the weekly shop go up. And it arrives just as the Federal Reserve and the ECB, which have already begun raising rates, have to decide whether to keep tightening against an enemy that monetary policy cannot reach.

In 1973 the Arab producers turned off the tap and the West learnt its lesson in queues at petrol stations; the International Energy Agency was born of that crisis. Today the tap is still open, on and off, but every barrel leaving the Gulf carries a burden that did not exist before.

Let us start with insurance. Before the war, the war-risk premium on a tanker was around 0.25% of the hull value. Today it ranges between 3% and 10%. For a $100 million ship, that means going from about $250,000 to paying between $3 million and $10 million. What is revealing is how that price is set. Between 10 and 20 October the Revolutionary Guard announced mine strikes on at least five occasions, none of them independently confirmed. Even so, each announcement made cover more expensive across the whole market.

An unverified statement now moves more money than many missiles

Then there is freight. According to the IEA, in mid-October shipping crude from the Gulf to Asia on a large tanker cost more than $37 a barrel, five times what it cost before the war. A supertanker carrying two million barrels will cross from the United States to Japan at the end of November for $81 million; last year that same voyage cost $9.1 million on average. Why so much? Because exporters, to avoid the strait, take the crude out on small ships and transfer it to supertankers in the Gulf of Oman. That manoeuvre ties up a large part of the global fleet and drives up costs even on routes that have nothing to do with Iran.

There is something else, and it says a great deal about the kind of war this is. According to Kpler, in the two weeks before 23 August around 80% of Hormuz traffic crossed with transponders switched off, at night and hugging the coast of Oman, under US air surveillance and in transit windows assigned by the Navy. It works, because the crude gets out and the price has not soared further. But it has a side effect. Nobody knows exactly how much oil is crossing; the Department of Energy estimated at the time between 8 and 9 million barrels a day, double what the trackers were showing.

The oil is getting through, but it is getting through blind, and a blind market charges a premium

We can see it in another figure that almost nobody mentions. Brent futures, which is the price quoted on the evening news, were hovering around $107 in mid-month. Physical Brent, the price paid for a real North Sea cargo, stood at $134. The screen says one thing and the quayside says another, and anyone who has to fill storage tanks buys at the quayside.

The link that worries me most is not petrol. It is diesel. In September wholesale gasoil topped $200 a barrel in Singapore and came close to $220 in Europe and the United States, almost twice the price of crude. Before the war the Middle East exported 4.7 million barrels a day of refined products; in September, barely 1.9 million. The IEA does not expect gasoil inventories to be rebuilt before the second half of 2027. Since diesel moves lorries, tractors and fishing boats, what we see at the pump today shows up tomorrow in the price of fruit.

In the United States petrol prices are up 34.2% year on year and accounted for more than half of the rise in September’s CPI, which reached 3.7%. The eurozone is at 3.8%, with energy up 18.8%. Spain is worse off than its neighbours, and the difference is not explained by oil alone.

The tax cut cushions the blow. Petrol stands at €1.78 a litre and diesel at €1.89, some 20 cents below the European average. But it is a borrowed cushion. The IMF points out in its latest report that measures that hold down prices cost between 3 and 22 times more than direct support for vulnerable households, and the decree’s timetable means that the tax step-up coincides with the ballot box.

Spain’s CPI closed September at 4.9%, its highest level since February 2023, and on the harmonised measure we reach 5%, above Germany, France and Italy. Core inflation is already at 3.1%, a sign that contagion to other prices has begun. And the relief has an expiry date. October’s discount of 20 cents a litre will fall to 13 cents in November and to 6 in December, so Spaniards will vote on 29 November just as that support is being withdrawn.

What can I say? I do not envy whoever has to explain January’s inflation figure.

I think part of the story is being told wrongly. It is often said that the war has arrived just as central banks were thinking about how to contain inflation. In reality they were already containing it, or at least trying to. The Fed raised rates on 16 September, the first time since July 2023, leaving them at 3.75%-4%. The ECB has raised twice this year, in June and in September, to 2.5%. The question is no longer whether to tighten, but by how much more.

The most useful thing in the IMF’s latest report is not its forecast of global inflation at 4.7%. It is that it breaks down the oil price in real time and separates what is physical scarcity from what is fear. Its conclusion is that in this war the two have weighed more or less equally. Half of the rise, therefore, is a risk premium. And that premium, by its estimates, has an effect on inflation that dissipates within six months to a year, and no measurable effect on employment.

To put it bluntly, raising rates does not get a single extra barrel out of Hormuz, nor does it lower the insurance premium on a tanker. What it does do is raise the cost of mortgages, of corporate credit and of refinancing for a state that is already paying considerably more than it did a year ago. The Spanish ten-year bond touched 4.13% on 5 October, its highest since 2013. The German Bund reached 3.62% in September, something not seen since 2009.

Should central banks therefore stand still? No. The real risk lies in second-round effects, when wages and services start chasing diesel. Keeping watch for that contagion is one thing. Raising rates in response to a Revolutionary Guard statement is quite another.

Almost every economist expects a pause from the Fed on 28 October and from the ECB on the 29th, followed by rises in December. Markets are pricing in some 75 basis points of hikes in the eurozone up to September 2027. To me that seems too much for an inflation rate half of which depends on what happens in a 33-kilometre strip of sea.

On Thursday oil hit five-month highs and yet the yield on the US ten-year bond, which had reached 5.36% the previous week, fell to 4.96%. The trigger was the sell-off in tech stocks, not Iran. But over the week energy, consumer staples and healthcare rose by more than 3%, the sectors where investors hide when they fear for growth.

With crude at highs, investors bought bonds on Thursday, and that is fear of recession, not of prices

This second wave worries me more than the one in March. Back then the system had shock absorbers and it used them. The IMF calculates that, without them, the closure of Hormuz would have put crude at an average of $110 this year and knocked almost a point off global growth. Production outside the Gulf, rerouting and strategic reserves limited the damage to 0.3 points. That ammunition has already been fired.

Observed global inventories are 509 million barrels below their level at the end of February. The US Strategic Petroleum Reserve has fallen to 283 million barrels, its lowest level since 1982. And OPEC+ spare capacity is almost fictitious. Saudi Arabia can produce 12 million barrels a day and pumped 8.3 million in September, but what it does not produce sits on the other side of the strait. The IEA puts the effective spare capacity of the whole group at 270,000 barrels a day, next to nothing in a market of more than a hundred million.

On top of that comes the second front. The Houthis are attacking Saudi facilities, and only 373,000 barrels a day of Saudi crude have passed through Bab el-Mandeb this month, the lowest since February. Without the Red Sea, the Saudi pipeline to Yanbu is of little use.

What is each side after? Iran wants sanctions relief and an end to the blockade of its ports, and it has found that every headline about mines gives it negotiating leverage without the need for a single verifiable shot. Trump needs cheap petrol until 3 November; that is why he has ruled out an attack before that date and, according to the Financial Times, held back an Israeli offensive planned for the weekend of 10 October. Netanyahu, whose re-election is at stake on Tuesday, wanted the opposite.

That is why I believe the current price is not pricing in peace. It is pricing in a postponement. The Financial Times’s sources consider it reasonable to expect the war to resume after the elections, and the IMF already has that scenario on paper. If the conflict drags on until mid-2027 with Hormuz and Bab el-Mandeb almost closed, crude would climb to $130 between the last quarter of this year and the first of next, and global inflation in 2027 would be 1.1 points higher.

I do not know whether that will happen. I do know which figure I would watch. It is not the Brent on the screen; it is the gap between that Brent and the one at the quayside. As long as that gap stays open, Tehran’s weapon works without any need to close anything, and central banks will keep trying to use interest rates to put out a fire fed by insurance premiums.