The Strait of Hormuz Crisis and US-Israel Strategic Rift Explained

[00:00:00]February 28, 2026 was a watershed moment in  history. It marks the day that a majority of Americans went from being unable  to locate the Strait of Hormuz on a map to the vast majority of Americans  saying that they have always told you that the Strait of Hormuz was the single  most important choke point in the world.

[00:00:22]Well, by virtue of watching this video, you  are almost certainly the type of person who actually always knew not only where the Strait  of Hormuz is but also of its importance.

[00:00:34]But now that we live in a world  where the Strait is causing all of those problems that we had  hypothesized about for years, something else is happening on top of it that  may force the White House to change course.

[00:00:47]So, today, we need to spend some time  discussing a quiet rift that has formed between the United States and Israel, how  it connects to the broader oil market, and what this says about  the broader war situation.

[00:01:00]But let’s begin with a quick overview  of what is happening along the Strait of Hormuz and how it illuminates a deeper puzzle.

[00:01:08]And I am going to focus just on the observable  consequences of what has happened so far, rather than give an overview  of a larger Hormuz strategy.

[00:01:18]I already covered that in a video from about  a year and a half ago. I just rewatched it, and the general principles hold up  quite well for our current predicament.

[00:01:28]The short version is that 20% of the world’s  oil normally transits the Strait of Hormuz.

[00:01:35]That is because almost all of the oil exports from  Iraq, Kuwait, Bahrain, and Qatar go through there, as well as the majority of oil from  Saudi Arabia, the United Arab Emirates, and Iran. Each of those last three countries has a  way to cheat oil around it, hence that qualifier.

[00:01:54]Well, the UAE in theory has a way to cheat. Just  bypass the Strait altogether and place the oil terminal on the other side. Simple enough,  right? Nope. Iran is attacking that too.

[00:02:06]Even when cheating on the oil works  to some degree, those alternatives ignore the situation with natural gas and  fertilizers. They transit the Strait too, plus there are food imports that need  through it. The situation is a mess.

[00:02:21]To think that Iran has caused all of  these problems not by actually firing on oil tankers transiting the Strait,  but just by threatening to fire on tankers crossing the Strait. Insurance  companies do not want to deal with it, so premium rates skyrocket, and tankers  will not move without affordable insurance.

[00:02:39]To situate where we are, a barrel of  West Texas Intermediate oil closed at $67 per barrel on February 27,  the eve of the war. By March 6, it had jumped to $90 a barrel. That was  likely well within internal White House projections conditional on the Strait  closing. A few days ago, I noted that the media conversation that this spike would  cause the administration to reevaluate the war was wrong, because you would need unexpected  information to force a change in behavior.

[00:03:11]Well, you did not have to wait much longer. We  saw that over the weekend when prices jumped to $116 per barrel, still largely reported  as a consequence of the Strait’s closure.

[00:03:23]That kind of price may very well have  exceeded the White House’s estimates, and it may indeed lead to a  reevaluation of what is happening.

[00:03:32]A one dollar increase in the price  of a barrel of oil roughly implies a 2.5 cent increase in the cost of a  gallon of gasoline. So at $116 per barrel, we would be looking at an extra  dollar per gallon at the pump.

[00:03:47]Beyond the sticker shock from U.S.  consumers, there are deeper problems here.

[00:03:52]Gasoline is an input good for just about every  finished product. Increase manufacturing costs, and you will have increased final costs. That is  just a fancy way to say “inflation is coming.” Given that Trump largely won the presidency  because U.S. voters believed that the Biden-Harris administration had failed at reining in costs,  that is setting up a political disaster for Trump.

[00:04:16]But it gets worse. Inflation  raises mortgage rates, another pain point for Americans. It  also increases borrowing costs for the U.S. government, a major problem when you  are carrying a $39 trillion national debt.

[00:04:31]Putting these problems together, you can see why the White House may have  been getting squeamish over the weekend.

[00:04:37]Perhaps they could weather a decent jump in  oil prices. But this was getting too high.

[00:04:43]Now, given everything that is at stake here, it is important to be precise about the cause  of the price jump. Moreover, the exact mechanism for the price hike is interesting and  speaks to a deeper strategic problem.

[00:04:56]During the same weekend in question,  Israel began bombing Iranian oil infrastructure. Netanyahu’s reasoning is  straightforward—Iran uses the oil revenues to fund its war machine. Cut the cash,  cut the capacity. It is the same reason why Ukraine is on month eight of its epic  refinery campaign against Russian targets.

[00:05:17]However, Israel’s move ran against  basically every element of the Trump Administration’s broader global strategy.

[00:05:24]Jumping back to Venezuela for a minute, there is  a reason why special forces executed a Special Maduro Operation, and the military did not  initiate a broader invasion. An invasion would inevitably lead to a degradation of state  capacity. And that would lead to Venezuela’s oil infrastructure falling into disrepair.  Hence the transition to Delcy Rodriguez, and the hope for a clean continuation  of the Venezuelan state apparatus, just one more compliant with U.S. demands.  That would not only keep Venezuelan oil flowing around the world, it was also  transition sales out of the gray market.

[00:06:02]Back in Iran, the military reality of the  situation has dictated a heavier hand and substantially more bombing. But you will  notice that the United States has tried to focus on attriting Iran’s military capacity. No  invasion, and, all things considered, relatively little degradation of the state’s infrastructure.  There is a hope and a prayer that protestors will force the government out of power without much  resistance in the country’s political center, so that the country can continue with business  as usual—relatively speaking—in the aftermath.

[00:06:35]Israel, of course, imports its oil. It  therefore does not escape the consequences of higher global oil prices. The difference is  that Israel cares a lot more about destroying Iran one way or another. The dollar extra per  gallon is a price imposed on the entire world; Israel only internalizes a fraction of the  consequences. But Israel captures the lion’s share of increased security from a neutered  Iranian regime. And so here we are, starting to see the cracks in its alliance relationship with  the United States. Hold that thought for a minute.

[00:07:09]Still, that does not get to the heart of  the strategic problem. Markets were not reacting to Iran’s oil infrastructure  getting damaged directly. After all, that oil was not hitting the  global export exchange anyway.

[00:07:22]Rather, the markets were reacting to the  expectation that the Strait of Hormuz would reopen in a timely fashion—and, namely, that  it would *not* reopen in a timely fashion.

[00:07:32]To draw a nuclear parallel, closure  of the Strait was supposed to create a mutually assured destruction incentive.  It would be a disaster for *everyone*, because countries on both sides use it  to export oil. The possibility that a conflict might shut it down therefore deterred  either side from jumping off the cliff of war.

[00:07:52]Or, at least once the parties had jumped the  continued closure was supposed to encourage both parties to come to the bargaining table  as soon as possible to resolve their dispute.

[00:08:01]However, imagine a world where Israel  continues to bomb Iran’s oil infrastructure into oblivion. Then what economic incentive  does Iran have to reopen the Strait? Well, there is still food and regular commerce  into Iran, but the main prize is gone.

[00:08:19]And mutually assured destruction is  gone along with it. Hormuz turns into a weakness for everyone else  and indifference for Iran.

[00:08:27]That is how you get the full oil shock. It is  not just that the Strait is closed. It is that Iran may lose the desire to negotiate to  reopen it. Hence oil at $116 per barrel.

[00:08:41]Okay. What can the United States do to  mitigate the damage? Unfortunately, not much.

[00:08:47]Usually when oil prices spike, you would turn to  Saudi Arabia and United Arab Emirates to turn up production, because they have the most slack in  their systems. Moreover, both countries would love to help out if it means punishing Iran. But  you can already see the problem: they are trapped behind the Strait. If anything, they are having  the opposite problem. There are only so many places to store crude oil. Once they start running  out of storage space, they will have to consider whether to shut down some wells, which will  inflate oil prices even after the Strait reopens.

[00:09:20]For the United States specifically,  the Trump Administration has floated suspending gasoline taxes or tapping into  the strategic reserve. Both of these are parlor tricks that do not solve the  underlying problem. The strategic reserve in particular is already low, so  any effect there will be very temporary.

[00:09:38]A better solution is for the U.S.  Government to assume the risk of ships passing through the Strait  by offering insurance. After all, to quote a prior administration regarding  Middle East policy, “you break it, you buy it.” This is the same thing Russia  did for shadow fleet vessels to great effect after Western insurers abandoned the country. And  indeed, the White House has proposed just that.

[00:10:03]However, you still need the vessel  operators to accept the scheme.

[00:10:07]The biggest problem there is that  humans ultimately operate the ships, and they might not want to assume the  personal risk of sailing though a war zone.

[00:10:16]As it stands, some tanker contract  offers have increased by an order of magnitude since the war began. Still  no takers among the tankers, though.

[00:10:25]You can understand their perspective. Trump  wants civilian vessels to go through the Straits, but the U.S. Navy is not even operating in  the Persian Gulf. Rather, they are staying in the relative safety of the Gulf of Oman  and the Arabian Sea. What does it say about the safety of civilian vessels if not even the  military has the confidence to go through there?

[00:10:46]Now, that may be about to change. The U.S.S.  Gerald R. Ford started the war along the Mediterranean coast of Israel. Its strike  group has since transited the Suez Canal, ostensibly to join the battle closer  to the Iranian coast. That may provide enough metal to begin expanding  the U.S. Navy’s presence northward.

[00:11:04]The military solution is to focus  more bombing runs along the Iranian coastline to reduce the direct  danger to tankers. Then the U.S.

[00:11:12]Navy can form convoys of tankers  and escort them through the area.

[00:11:16]The United States ran a similar scheme  for more than a year during the Iran-Iraq War. This fell under the banner of  “Operation Earnest Will.” Unlike today, it was not a response to a direct  closure of the Strait. Rather, Iran and Iraq targeted tankers connected to each  other’s coalitions throughout the Persian Gulf.

[00:11:35]The operation was complicated, not  only for the ships in the water, but also for the surveillance in the sky. The  United States had to use AWACS planes to survey the threat landscape, something that they are  currently doing over the entire Middle East.

[00:11:48]Nonetheless, the plan worked as intended, and  the Navy still has the capacity to do this.

[00:11:53]However, the simplest solution  to get oil prices somewhat under control is for the White House to rein in Israel.

[00:12:00]Israel may value the results of the operation  in Iran more than the United States, but Netanyahu still depends on U.S. mass  to pursue the war in relative safety.

[00:12:10]This is how the conversation began about whether  Israel entrapped the United States in this war, primed by Marco Rubio’s comments that  the United States had to strike first because Israel would have anyway, and  it was bad to lose the initiative.

[00:12:24]Now, the dichotomy between entrapment and  abandonment is common in any alliance, where solutions to prevent patron states  from abandoning protégé states increase the risk of proteges entrapping  patrons. Yet solutions to prevent protégés from entrapping patrons increase  the risk of patrons abandoning protégés.

[00:12:42]Overall, the Iran War does not feel much like  a case of entrapment. Entrapment implies that the patron would have preferred the  status quo to military action. Here, though, the United States very much feels  like a willing participant. Lest we forget that Trump wanted to start shooting  earlier, and he only pumped the breaks after coalition partners convinced him to  first deploy more defenses to the region.

[00:13:05]However, the White House might feel partially  entrapped by certain aspects of the conflict, particularly when it comes to targeting oil  infrastructure. Reports indicate that the United States told Israel to cut it out. And  maybe Netanyahu internalized that message. The leverage the United States has here is to  abandon Israel in the middle of a war that Israel would very much like to continue, even  if oil infrastructure is no longer on the table.

[00:13:32]Now, those oil price highs of $116 per barrel  over the weekend eventually descended to $85 by late Monday. One way to interpret what  happened there is that the markets believe that Israel will indeed comply with the Trump  Administration’s request. The $85 price tag is still elevated, but back within reasonable  expectations given the Strait’s closure.

[00:13:56]Notably, the price drop off was not a consequence  of Trump’s comments that the war will end “very soon.” The number was falling well before  that news came out late in the afternoon.

[00:14:06]And the prediction markets did not believe that  either. The likelihood of a ceasefire by March 15 was at 7% before Trump’s comments. It briefly  spiked to 19% before descending back down to 8%.

[00:14:20]It seems that the crowds realized that you  probably should not listen to what leaders say, and that Trump has strong incentives  to convince an American public that is very skeptical about the war that  fighting will not continue forever.

[00:14:32]High oil prices will only make the American  public more skeptical. At $85 per barrel, though, the Trump Administration will feel  safe enough to continue the war until it is militarily satisfied. Still,  the situation remains volatile, and other landmines (or sea mines) could very well  cause a new shock. And there is also no guarantee that Israel will not directly cause new shocks  by hitting Iran’s oil infrastructure once again.

[00:14:58]Meanwhile, I will spare you any  further shocks today by simply ending things here and telling you  about this playlist that can get you up to speed with everything that  is happening in the Middle East.

[00:15:08]And if you enjoyed today’s  video, then please like, share, and subscribe, and I will  see you next time. Take care.