Political elites in both the United States and Iran are attempting to force regime change on their adversary. The US wants Iran to pick new leaders and to abandon its nuclear ambitions. Iran knows that higher gasoline and diesel prices are likely to hurt US President Donald Trump’s Republican Party in November’s midterm elections. Neither side is deliberately targeting the many millions of poor people around the world who are suffering as a result. For both the US and Iran, the increase in global poverty is an unintended consequence that helps leaders in neither place achieve their objectives. If Iran wants to punish the US with higher energy prices, it will also punish the world’s poorest.
The US might still attempt to seize effective control over the Strait, forcing it open. But this option seems like a recipe for a long and bloody quagmire. The Kremlin is the main beneficiary of the Strait’s closure, and US sanctions on Russian oil exports have now been relaxed. Russian President Vladimir Putin presumably likes it that way and has an obvious incentive to resupply Iran – the national government or small militia groups – with enough drones to threaten the Strait indefinitely. The specter of Vietnam in the 1960s, supported by nuclear-armed Russia, looms large. If the US wants to punish Iran, the Strait will remain closed, upending the lives of people everywhere.
The best way to step back from the brink of global catastrophe is to recognize Iran’s economic incentives. Iran needs to export oil and gas in order to pay for essential imports, including food and medicine, as well as for the inputs needed to rebuild and improve its infrastructure. Even before the destruction wrought by this phase of the conflict, Iran’s civilian economy suffered from severe underinvestment. Iran can and does sell some oil to China, but the existing US sanctions regime makes this difficult (and there are likely significant discounts involved). The currently impeded flow of oil is not enough to pay for what the Iranian people need.
But it doesn’t have to be that way. Iran currently has the capacity to produce about 3.7 million barrels of oil per day, of which around two million are used for domestic consumption. Of the remaining 1.7 mb/d, about 0.7 mb/d are needed to pay for agricultural goods and medicine—most of which could come from the US and Europe—and the remaining million could be used to buy imports needed to modernize transportation infrastructure, along with renewable-energy systems and energy-saving technologies from manufacturing powerhouses such as Germany, China, South Korea, and Japan. (For these calculations, we are assuming the price of oil returns to be around $70 per barrel, which is the price at which new shale fields are brought online.)
With more investment, Iran could likely increase its exports by at least another 1-1.5 mb/d. The rate of return would be high, both from the perspective of investors and for the Iranian government. Who would be willing to invest? European and US oil services companies have the best technology available, and Iran’s neighbors around the Persian Gulf have considerable practical experience (and capital to invest).
But no one in their right mind will want to invest unless and until there are sufficient guarantees, internal and external, that the potential financial returns can actually be realized. For there to be investment, there needs to be peace. And for there to be peace, the nuclear issue must be addressed in a way that convinces all parties.
The deal that the world should aim to put on the table is this: If Iran places its nuclear energy program under proper international supervision (explicitly to prevent the development of weapons), preferably integrating it with a regional fuel-enrichment consortium, it is likely to become much more prosperous by reaping the benefits of higher oil and gas exports. The focus of this development strategy should be investment in civilian infrastructure, energy-saving technologies, and a significant expansion of the service sector—all proven ways to create more good jobs and build an Iranian middle class.
The alternative is continued hostility or waves of inter-state violence that include the US and its allies. This would drive Iran closer to Russia, creating the prospect of a broader conflict. And through it all, the prolonged closure of the Strait of Hormuz would imperil people everywhere who already struggle with poverty and economic precarity.
That is the path we are now on, which is why the world desperately needs de-escalation in the Middle East. The way to achieve it is to acknowledge Iran’s economic incentives and negotiate accordingly.
About the Author:
Simon Johnson, a 2024 Nobel laureate in economics and a former chief economist at the International Monetary Fund, is a professor at the MIT Sloan School of Management and Co-Director of MIT’s Stone Center for Inequality.
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.