Iran's attack on a U.S. drone was not a wise move, according to President Trump who said "Iran made a very big mistake" via a tweet.
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The situation spotlights the battleground which is: the Straits of Hormuz. Over 30 percent of our daily supply of petroleum and liquified natural gas go through the waterway. More than likely if a major conflict breaks out, the strait would be ground zero for Iran and the world. Iran has many times threatened to close this waterway and is uses it as its biggest threat against the U.S. and the rest of the world.
The downing of the drone pushed U.S. oil prices to the $56 per barrel level, while Brent, the global benchmark, hit the $64 level.
There is no doubt that if Iran did attempt and succeed in closing the waterway, it would have a big impact on oil and the global economy. President Trump told Fox News that if closed, it won’t be closed for long.
The U.S. and other nations, of course, would attempt to not let that happen but reopening the strait might be more difficult than one might think. Iran has been preparing for this for decades and while the U.S. and our allies would ultimately win the conflict and take control, it won’t be easy. Iran has spent years building up militarily and preparing to try to close that strait and while it may turn out to be their Waterloo before it gets reopened there could be some significant disruptions to the global energy supply chain.
A conflict with Iran may have more risk to Americans than just the price of oil. The potential of a sharp rise in oil prices may create a shock to the economy even against a backdrop of near-record U.S. oil production.
A sharp price increase due to a natural disaster or war is the type of price increase that can do real damage to the global economy. This is referred to as a price shock when businesses can’t react to the speed of the increasing prices. It is a situation where prices rise so fast that our economic engine can’t react quick enough and get frozen from doing more business. This type of event could take a major bite out of economic growth worldwide and in the past has even caused recessions. So the next couple of days are critical for all of us and our wallets.