With Iranian pressure on both the Bab el-Mandeb and Hormuz straits, the Trump administration needs to lower gas prices before November.

Apart from the anniversary of the 9/11 terrorist attacks on the US in 2001, the headlines Friday morning were dominated by the major victory Yemen’s Houthis won against the Saudi-backed Yemeni government. Houthi forces in a single night swept into a large swath of territory along Yemen’s Red Sea coast, taking control all the way down to the tip of the Arabian Peninsula at the Bab el-Mandeb Strait, and seizing control of the strategic island of Perim in the middle of the strait. 

The collapse of government forces was astonishingly easy, allowing the capture of a huge trove of Saudi-provided equipment and drawing comparisons to the Iraqi Army’s rout in Mosul at the hands of ISIS in 2014 and the collapse of Bashar al-Assad’s forces in December 2024. Houthi missile strikes on the Saudi East-West Pipeline also appear to have shut down this critical artery bypassing the Strait of Hormuz, at least for now. The oil markets were also digesting a story in The New York Times showing a plunge in Saudi oil exports even before the pipeline stopped operating due to the Houthis’ threats against Saudi shipping in the Red Sea. 

Meanwhile, The Wall Street Journal also reported on September 11 that President Donald Trump’s inner circle of advisors has raised with him the possibility that the current US strategy of a naval blockade combined with severe economic pressure may not force Iran to yield before the end of his term of office in January 2029. Despite this grim outlook for the war, Trump’s senior aides have not suggested returning to the negotiating table with a modified position reflecting this reality. 

Indeed, Trump has continued to use the word “surrender” when describing what he expects as an outcome from the US pressure on Iran. No reporting has described senior officials tasked by Trump with crafting a more viable negotiating strategy, and Trump’s aides seem to think the status quo of limited war and economic pressure can continue as long as it takes, even if it is handed over to a successor. Vice President JD Vance seems to have a somewhat different view, but seems unwilling to clash with Trump over the issue since he lacks the authority to make decisions. 

This should be sounding alarm bells all over Washington. While the oil market has begun to wake up from its summer complacency, with Brent crude oil prices rising sharply with yesterday’s news, many people still feel a false sense of security because they are not familiar with quantitative analysis of oil markets. After the initial shock of the war ebbed, the market’s conventional wisdom in the early summer held that the crisis with Iran was on its way to a negotiated resolution and that strategic reserves and commercial inventories would be more than sufficient to absorb the shock. 

Now, it is quite clear that there will not be a quick resolution, and over six months of supply losses have substantially depleted both strategic and commercial inventories. Inventories of petroleum products are in even worse shape, with global refining capacity taking two major geopolitical hits: the loss of export-oriented Gulf refinery capacity cut off from normal transportation, and the shutdown of nearly half of Russia’s refinery capacity due to Ukrainian drone attacks. 

Diesel is in short supply, with the average in the United States hitting $6 as of September 10. Gasoline prices are more visible to consumers, but diesel contributes to inflation, as economists know. All of this makes it more likely that the Federal Reserve will raise interest rates at its September meeting next week, despite President Trump’s often-stated wish for a loose-money policy. 

Administration officials have frequently talked up the US-escorted tankers still operating on the “Oman route” through the Strait of Hormuz. Still, most people in the private sector scoff at the numbers they have put out publicly, where analysts can track tankers via satellite photos even when transponders are turned off. In addition, this traffic is limited by the lack of insurance cover. 

Most of the tankers currently shuttling crude through the Hormuz Strait to the Gulf of Oman are owned by Gulf Arab national oil companies and can therefore take the risk, but privately owned tankers will not. It may be heresy within the administration to admit it, but most private-sector observers do not expect the volumes coming out of the strait to rise much from the current average level. The Houthi gains in Yemen yesterday only make this worse by choking off Red Sea transport, and for now at least shutting the pipeline that gets Saudi crude to terminals there. It will be repaired, but it can also be struck again.  

Continuing the status quo with Iran can be expected to raise oil prices until demand falls enough, which most economists expect to be largely driven by slower global economic activity. Outside oil circles, it may seem that the specter of $150 crude has vanished, but with these changed circumstances, that is no longer the case. 

Finally, apart from the untenable economic situation this will create if we maintain the status quo for another couple of years, it will do much more damage to the US position in the region. Apart from the United Arab Emirates, which still has a bypass pipeline running, the other Gulf states are taking it on the chin. Iraq has diverted and restored some flows, but it will face an untenable budget situation within months. Qatar has assets, but very little revenue at all from LNG or oil. Egypt is being hit by high oil prices and a sharp drop in Suez Canal revenues, which are critical to its state budget. Those are just a few examples. If the United States continues to be indifferent to their plight in preference to maintaining pressure on Iran via the blockade, it will severely test those relationships. 

The Trump administration needs a new strategy, now that it seems to understand the current approach won’t work in an acceptable timeframe and is causing significant collateral damage to the United States and its partners. This cannot just be left on autopilot. But who among the inner circle would be willing to step up and have that conversation with President Trump? 

About the Author: Greg Priddy

Greg Priddy is a senior fellow for the Middle East at the Center for the National Interest. He also consults for corporate and financial clients on political risk in the region and global energy markets. From 2006 to 2018, Mr. Priddy was director, global oil, at Eurasia Group. His work there focused on forward-looking analysis of how political risk, sanctions, and public policy variables impact energy markets and the global industry, with a heavy emphasis on the Persian Gulf region. Prior to that, from 1999 to 2006, Mr. Priddy worked as a contractor for the US Energy Information Administration (EIA) at the US Department of Energy. Mr. Priddy’s writing has been published in The New York Times, The National Interest, Barron’s, and The Nikkei Asian Review, among others.

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