Oil Shock continues, July 10, 2026

[Jon Freise]

Hi Everyone,

Never a dull week.  And we are unlikely to see a dull week between now and the midterms.  There are so many things to write about tracking the Confederate power consolidation and its support from the Supreme Court.  But plenty of other commentators are covering that.

I want to write a short note on the Iran war and oil shock.

Here are a few sources that I am finding helpful:

Dr. Pape is, I feel, doing a very good job of sorting out the forest for the trees.  Here is his latest extensive free posting that anyone can read.  It gives his feeling of why the MOU has fallen apart and why he does not think the oil shortage will be resolved soon.

https://escalationtrap.substack.com/p/situation-report-special-edition-3e1

Rory Johnston is one of many commentators covering the oil shock situation.  His latest piece discusses why gasoline and diesel prices are high while oil prices are moving lower.

https://www.commoditycontext.com/p/is-big-oil-price-gouging

The topic I want to cover is the question: Will the oil shock lead to a recession or depression?

A good question and it cannot be answered.  It cannot be answered because we do not know what the different actors involved will do.  Specifically, will Iran and the US both agree to allow free and open shipping through the Strait?  And will they do so before so much damage is done to oil terminals and refineries so that flows could return to February levels?

Oil prices right now are very low.  They dropped almost to prewar levels.  But actually the world is short over a billion barrels of production.  So why so low?  Because some crude oil is getting out through pipelines that bypass the strait.  And because the US and China are both pulling down their strategic reserves.  This has essentially hidden the impact of the war.  But there are two problems: 

First, Iran can hit any of those bypass pipelines.  It did it early in the war to demonstrate that it could.  And strategic reserves are limited.  Meaning they cannot make up for lost production for very long.

Normally you would only release the SPR when oil prices were really high.  Just enough to prevent shortages.  But they are releasing too much oil too fast and driving the price down.  That drains the SPR faster and sets us up for shortages later (defeating the purpose of the SPR).

We know that the US SPR will likely hit its minimum operating level in about August.  But we have no idea when China will stop releasing oil.  It must happen at some point.  If the Strait is not open and fully flowing at that point, then real shortages will start.  Oil prices will rocket up.  And there will be no oil in storage to pull down the cost.

Since we cannot predict the future, one technique is to lay out two scenarios:

1. The Strait reopens before the SPRs run out and provide enough oil that there is no shortage.  In this case a recession is likely avoided.

2. The Strait does not reopen with enough flow to handle the demand when the SPRs run out and thus prices must rise until demand is destroyed.  And that demand destruction is accomplished by a recession.

Then we ask: Which is more likely to happen?  And if both are likely, then do we have a contingency plan that covers both?

Both are very possible.  Trump would like to go back to the way the world was before they made the February strikes.  He offered Iran 300 billion to just pretend the attacks never happened.

Iran striking shipping in the Strait was Iran saying "No, not good enough.  We demand control of the Strait".

The problem for Trump, and the world economy, is that Iran is not interested in a return to the February status quo.  They just suffered a worse than 9/11 strike.  It would be as if the terrorists had not only hit the twin towers and the Pentagon, but also took out the white house, the president, the cabinet, and one of the bodies of congress.  And they did that for 7 weeks.  And then they wanted the US to just turn the other cheek.  Remember back to the jokes of 2001?  "What is the temperature in Baghdad? 4,000,000 degrees".  And Iraq never attacked us.  That was just the spill over anger that turned into the Iraq invasion quagmire.

Yeah, that is the level of anger that is going to be coming back at the US.  The US wasted trillions on the Iraq war before we finally tired and pulled out.  It took years.

If we assume Iran has that mindset, then they might want to inflict that kind of damage on Trump and the US.  And they have only one weapon that can reach the US, the oil shock, then the second scenario is what they would choose.

And that does not even touch on the issue of Israel in Lebanon or Iran getting a nuclear weapon.  There are many reasons to think that the Strait will not fully open until the US allows Iran control of the Strait (a key demand they have made) and withdraws from the region.

Can Trump give them that?  Politically?  And when will he fold?  By August when the US SPR runs out?  Or in the fall sometime when China's might?  Or after that?  After the oil prices are so high for so long he feels crushed?  You pick.

Me? I think a recession is very possible.  Supply chain chaos.  At the same time we are looking at highly contested mid term election results.  A non-functional Federal government.

This is what Transition Towns was talking about when they were talking about forced relocalization.