AUSTIN—More than nine weeks into the three-day war on Iran—recently declared “over” by the White House even as threats continue—it is not yet possible to disentangle rationales and pretexts. What was said in meetings, and by whom, even when a full accounting emerges, will not necessarily be dispositive, because some unstated reason may still underlie whatever argument was made.
We do know that Donald Trump’s presidency is dominated by a real-estate culture. The president, his family, key cabinet members, advisers, and donors are drawn from the world of hotels, luxury resorts, and casinos. They are not lawyers, elected officials, or lifelong bureaucrats, let alone college professors. Prices and asset values are their bread and butter. So, let us suppose that they have thought this through in terms of the economics of oil.
Our analysis can start with the fact that the United States is now the world’s largest oil producer, owing to fracking in the Permian Basin of West Texas and southeastern New Mexico. With the estimated break-even price for Permian crude (about $65 per barrel) higher than the oil price was between July 2025 and February 2026, the well count in the Permian has fallen by about one-third since 2023, with production reaching a record in 2025, thanks to improved efficiency. Arguably, the pre-war price was too low for sustained profitable drilling, and so for the private-equity interests who had moved into the Permian Basin in 2020-21, when oil properties were very cheap.
The effect of the war’s first month was to take oil supplies from the southern Gulf largely offline, reducing global oil flows by about 10%. From these basic facts, a valuation formula that Jing Chen and I present in our book Entropy Economics predicts a price increase of 60%. In the event, West Texas Intermediate (WTI) crude rose by 60%—from around $65 to $104 per barrel—during the first month of the war.
From the US producers’ perspective, this was a good result—a bit too good. When prices rise above $90 per barrel, cost-push inflation begins to bite at home, and Asia and Europe begin to suffer painful shortages (not only oil, but also sulfur, urea, and helium). And if the price goes much higher, demand begins to fall. As the war continued, prices surged above $110 per barrel until April 8, at which point the US declared a ceasefire, and they fell.
No one can ever be sure what Trump is thinking, but he may have realized that another attack on Iran will not work. The Islamic Revolutionary Guard Corps has made clear that it would retaliate by destroying critical infrastructure across the entire Gulf and in Israel. According to our formula, a full shut-off of the Persian Gulf would drive the WTI price to about $155 per barrel, which would collapse the market and bring prices back down the hard way. The best result for the US side, then, is an open Gulf with a reduced flow, yielding a US price between $80 and $100 per barrel.
The problem is that if Iran controls the flow, this optimal price for the US is also very good for Iran. Indeed, Iran upped its production in March, taking market share from the blocked and damaged southern Gulf. The irony is striking. Although the two countries are at war, their governments’ economic interests appear to coincide. Of course, from the US-Israeli perspective, the wrong country is benefiting from a partial shutdown of the Strait of Hormuz.
The Trump administration thus responded with a blockade, though without enough ships to catch all the Iranian ones. The choice of a blockade implies hope for a deal, whose unstated purpose could be to stabilize the price in the desired range for the rest of Trump’s term. This would be a win-win for the US and for Iran. But it would likely mean sacrificing the US-allied Arab monarchies in the Gulf and delivering a strategic defeat for Israel. The United Arab Emirates’s departure from OPEC might be read as a reaction to this possibility; so, too, might Israel’s pressure to renew the war.
The result is a gigantic game of chicken, with the world economy on the block. Even a leaky blockade might, over time, force Iran to fill its oil storage, and then to curtail production. With that potential leverage, Trump has an interest in drawing out the face-off for as long as possible. But naval deployments cannot last indefinitely, and one damaged aircraft carrier is already heading home.
If Iran can hold out, the US eventually will have to fold, and the oil price will fall as production recovers. By tolling traffic through the Strait, Iran can then prosper at a lower price level, even with an entirely open Gulf and all taps flowing. As for the US, its own energy independence, and Europe’s recent dependence on US oil and liquefied natural gas, will gradually decline. Much of the world would then have to turn to Russia and to the Persian (now very “Iranian”) Gulf.
Trump and his people therefore face a dilemma. They could collapse the world economy now (and maybe they will); they could walk away (and maybe they will), accepting both an immediate defeat and longer-term erosion of the US position; or they can stall and hope for a deal. And if an unpalatable deal is the best Trump can get, his interest is to stall for as long as possible and pray for a miracle.
His prayer is unlikely to be answered, though. Iran is tough, and time is (mostly) on its side. The Iranians know that the usual American endgame (not unique to Trump) is to walk away from defeat, take the humiliation, and move on. In that case, the oil price will fall, and eventually the private-equity interests in the Permian Basin will go bust. It may take a while to get there, with flip-flops and bombast along the way; but short of a global calamity (still a distinct possibility), this seems to be the way out.
In principle, the US could take another path over the longer term. Voters could kick out the speculative class now in charge, and the country could develop a national energy policy—and start producing, pricing, and allocating energy for the benefit of the whole US population. It could even return to the international community as a partner, rather than as a would-be imperator.
Then again, one should never bet on something just because it is possible.
Copyright: Project Syndicate, 2026.
James K. Galbraith, professor at The University of Texas at Austin, is the co-author (with Jing Chen), most recently, of Entropy Economics: The Living Basis of Value and Production (University of Chicago Press, 2025).
