How to Reinstate the US Blockade of Iran

There's ways to make the US blockade even more painful for Iran this time around

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When I first proposed the blockade, we were in the first few weeks of the war, when Iranian oil tankers were transiting the Strait of Hormuz freely, even as Iran blocked any and all Western ships. That was obviously a ridiculous situation and dragged on until mid-April only because so many commodity analysts were screaming about oil going to $200. It’s to President Trump’s credit he ultimately ignored those voices and imposed the blockade on April 13.

The blockade was lifted on June 18 as part of peace negotiations and it now looks like that was premature. Today’s post explains how to reinstate it to make it faster-acting and more impactful than in its first iteration. Two things need to happen. First, some mistakes were made in the first round of the blockade, like allowing empty oil tankers to enter the Persian Gulf, which Iran then used as floating storage. That can’t happen again. Second, Iran has gained valuable breathing space since June 18, exporting huge amounts of oil, helping to empty storage tanks that were overflowing and pump much needed hard currency into its faltering economy. The US can neutralize this breathing space by taking a number of steps.

Most importantly, a second iteration of the blockade can’t just pick up where things left off. It has to start with a bang. The whole point is to bring Iran to the negotiating table in good faith. If the first iteration wasn’t onerous enough to do that, this round needs to be harsher. That’s the signal that must be sent to Tehran from the outset.

Before I go into what needs to happen, here’s a quick review of how the blockade hits Iran. There’s three channels. First, the blockade causes panic and capital flight. This effect hits immediately and is what caused the Rial to weaken right after the start of the blockade in April as the chart above shows. Second, within a few weeks Iran starts to run out of storage for all its oil, which is why it brought empty oil tankers into the Gulf for floating storage. Third, export revenues start to fall off within a month or so, making it impossible to pay for imports. This is why - by May - Iran’s imports from countries across Asia had fallen so much more than for others in the Persian Gulf. The chart below documents this for Thailand as an example.

There’s therefore little doubt that the first iteration of the blockade worked well. It hit Iran’s economy meaningfully while doing little to spike global oil prices. That said, it’s also clear that Iran’s hardliners think they can extract more concessions from the US, which is what explains recent attacks on Western ships transiting the Strait. There’s now three things that need to be done. First, the blockade should restart quickly and - critically - empty Iranian tankers must be prevented from entering the Gulf. Second, storage tanks can be sabotaged or destroyed, which means the breathing space Iran gained in terms of storage can be undone. That can be done selectively, since even a few examples will frighten the regime in Tehran severely. Third, a clear signal needs to be sent that this iteration of the blockade will be more onerous than the first. Iran has two hubs from which it exports oil. The first is Kharg Island in the Persian Gulf, which handles about 90 percent of exports. The second is the port of Jask on the Gulf of Oman. Loading berths in this port can be disabled militarily to send the message that Iran’s regime needs to stick with the peace process.

These three things together would make a second iteration of the blockade more impactful and make up for lost time. Given oil prices never went to $200 in the first iteration - as the chart above shows - there’s room now to be more aggressive.