The ‘Stability-Instability Paradox’ Comes for Markets
This is not yet an economic catastrophe, but it could very easily become one.
The ongoing conflict between the United States and Iran, now dubbed the "Stability-Instability Paradox," has seen the administration adopt a strategy of maximum economic pressure, likened to an "economic D-Day" by Treasury Secretary Scott Bessent. Despite rounds of airstrikes and announcements of peace talks, these efforts have not moved the needle, leading the administration to believe time is on their side.
However, this approach poses significant risks as escalation and global consequences have largely been managed thus far, creating misplaced confidence in their resilience.
The war's economic consequences have remained manageable so far, leading to a misplaced belief that they will continue to do so. During the Cold War, strategists identified a similar paradox, where the fear of direct superpower nuclear war led to increased competition in other forms, such as proxy wars and covert operations. However, the confidence that catastrophe was too irrational for either side to permit actually encouraged risk-taking, making such catastrophes more likely.
The recent oil price shock, caused by the U.S.-Israeli war on Iran, was relatively mild due to mitigation measures, such as bypass pipelines, releases from strategic petroleum reserves, and the growth of new, greener technology. This luck was bolstered by over-supply prior to January and the strategic decision by China to accumulate excess oil to fill its reserves. This combination of planning, adaptation, and luck has largely kept oil prices from causing a worldwide economic meltdown.
However, the milder-than-expected impact of the oil price shock has reinforced the assumption that the war will end before a genuine crisis hits. This confidence, while understandable, is now precarious as the buffers that made the initial shock manageable are being depleted. U.S. strategic petroleum reserves are at their lowest level since the 1980s, and while some oil traffic continues through the Strait of Hormuz, it is significantly lower than during the cease-fire period and pre-war levels.
Additionally, threats from Yemen's Houthis could further endanger oil shipments via bypass pipelines, creating uncertainty about the future.
Written by urgent.news from Foreign Policy's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
