Friends in Crisis: What Trade Tells Us About Iran and Israel
The Sunday Essay ☕️
There’s a war happening beneath the headlines—not one of missiles, but of markets, oil flows, and maritime chokepoints.
We’ve spent the last several essays unpacking how global power works beneath the surface—how trade routes, energy flows, and economic dependencies shape alliances and spark conflicts. We’ve dug into history, precedent, and theory. Now, another real-world crisis is unfolding. It’s volatile, emotional, and personal.
Applying Our Trade Lens to the Iran-Israel Crisis
I have friends in Tehran and friends in Tel Aviv. I fear for both. But to understand this recent surge in conflict, I need to do something tough: step back.
If I want to see things objectively, I have to quiet my emotional bias and view the world not as a morality play, but as a system of leverage, risks, and rewards.
That might sound insensitive, but I think more clearly when I compartmentalize my emotions.
This moment—the rising tension and war between Iran and Israel—is an unfortunate live case study. It’s where all the frameworks we have recently discussed come together.
Politicians and headlines spew noise, but if we step back and view the world through the lens of trade, identifying incentives and vulnerabilities, we can see things more clearly.
That’s the point of this recent series: to take our understanding of trade and power and apply it, not in hindsight or abstractly, but right now, while the stakes are real and the outcome is uncertain.
Viewing this conflict through the lens of trade pulls our focus to one area in particular - Iran’s southern coast, the Persian Gulf. Let’s explore the region, trace its trade flows, and understand its strategic importance.
The Persian Gulf and Why It Matters
The Persian Gulf is a large inlet shared by the coastlines of the UAE, Qatar, Saudi Arabia, Kuwait, Iraq and Iran.
It is the source of 25% of the world’s oil and 20% of its natural gas.
Every day, massive oil tankers enter the Gulf to take shipments from the Gulf States to the open ocean for global delivery.
But between the Persian Gulf and the open sea lies a narrow chokepoint: the Strait of Hormuz.
The Strait is less than 50 kilometres wide at its narrowest. It’s like a valve, the only maritime gateway for Gulf States to access global markets.
It’s one of the most strategically important places on earth.
Of all the countries along the Gulf’s coastline, Iran controls the longest stretch, including the entire northern side of the Strait of Hormuz.
How much does that matter? Historically, not so much. Recently, it’s started to matter a lot.
The Strait of Hormuz: A Growing Leverage Point
For most of the post-Cold War era, Iran’s grip on the northern coast of the Persian Gulf—stretching across the Strait of Hormuz—was a geopolitical footnote. In a world of stable energy markets and globalized trade, it was just coastline. But over the last six years, that geography has become leverage.
Tensions in the Strait haven’t arisen out of nowhere. They escalated after the U.S. withdrew from the Iran nuclear deal in 2018 and reimposed sanctions on Iran’s oil exports in 2019.
Those sanctions crushed Iran’s oil revenue, fueling one of its worst economic crises in decades. Iran has retaliated by disrupting the Strait tanker traffic: laying sea mines, harassing or seizing foreign oil tankers, and positioning anti-ship missiles along its coast. The message is blunt: You can sanction our product, but we can choke your supply chains.
The U.S. has responded by hosting military drills in the region, intercepting Iranian vessels, and pressuring partners to cut economic ties with Tehran.
Each move prompts a counter, deepening the cycle of provocation.
And Iran’s threat isn’t just firepower—it’s psychological. Simply threatening to disrupt the oil traffic in the Strait spikes insurance premiums for shipping companies, slows tanker traffic, and rattles global markets.
You need only threaten 25% of the world’s oil supply, and inflation spikes.
In today’s climate, Iran’s shoreline matters. A lot. The U.S. knows that as long as Tehran dominates this chokepoint, it holds a veto over a quarter of the world’s oil trade. That leverage grows harder to ignore every year.
Did Sanctions on Iranian Oil “Work”?
Iran, with the third-largest oil reserves and likely the second-largest natural gas reserves globally, is sanctioned by the U.S. and barred from the dollar-based oil market.
That’s a big deal for a country with such vast energy wealth.
However, Iranian oil still reaches the market, albeit with more hoops to jump through.
Iran exports oil via two key channels: China’s “Teapot Refineries” and a covert shipping network called the “Dark Fleet.”
As mentioned, the U.S. reimposed sanctions on Iran’s oil exports during Trump’s first term. Most countries avoid Iranian oil to steer clear of U.S. wrath, so Tehran sells at a discount using covert delivery methods.
The “Dark Fleet” or “Ghost Fleet” is a network of aging tankers that operate without active transponders, vanishing from global tracking systems to evade sanctions. These ships, often owned by shell companies and registered under flags of convenience in countries like Panama or the Marshall Islands, transport up to 1.7 million barrels of Iranian oil daily, primarily to China.
China’s “Teapot Refineries”—small, independent facilities in Shandong province—buy this oil at steep discounts, sometimes $3 to $11 per barrel below market rates.
Unlike state-owned giants, these private refineries have flexibility and plausible deniability, circumventing sanctions.
These deals carry political risk but make economic sense for both China and Iran.
The Iranian Revolutionary Guard Corps (IRGC) is deeply tied to this system, using oil revenues to fund military operations. This setup keeps Tehran economically afloat and lets it project power despite sanctions.
Okay, after a high-level review of the region, what should we watch?
The Strait of Hormuz is the Big Prize
Despite sanctions, Iran holds leverage over the global oil market via the Strait of Hormuz. Would the US want to exert that leverage for itself? Absolutely.
As long as 25% of the world’s oil flows through the Strait, any disruption will ripple through U.S. gas prices, inflation, and national security. Controlling that chokepoint isn’t just regional geopolitics—it’s economic insurance for America.
Sanctions are a Gift to China
U.S. sanctions on Iran’s oil, meant to choke Tehran’s economy, have an unintended winner: China.
By barring Iran from the dollar-based market, Tehran sells its oil at steep discounts to China, fueling its economy with cheap energy. What’s a penalty for Iran becomes a bargain for Beijing, showing how trade restrictions can backfire in a global market.
Therefore, China enjoys the status quo and has a stake in this standoff.
The Strait as America’s “Nickel Play”
We’ve discussed how China secured proxy dominance over the nickel market by financing Indonesia’s nickel mining and refining infrastructure. The U.S. may be making a similar play in the Strait of Hormuz.
Like China with nickel, the U.S. doesn’t need outright control—just enough leverage to shape outcomes, disrupt adversaries, and protect its market position.
If the US can seize Iran's leverage over the Gulf States for itself, it would claim a near monopoly over the oil market through domestic and proxy influence.
What’s in the Ground Always Matters
Iran sits on the third-largest oil reserves and arguably the second-largest natural gas reserves. That’s not just a number—it’s energy, revenue, and geopolitical weight.
If fully accessed, Iran’s reserves could rival those of Gulf state powerhouses. One can’t ignore the simple math that if a future Iranian government were to align with Western interests, those reserves could (in theory) rejoin the open market under U.S.-led terms.
In theory.
And if you don’t study history, you might even think it is worth trying.
That’s all for today.
Have an amazing Sunday,
Jay
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31 km at its narrowest point.
You titled this story, "Friends in Crisis: What Trade Tells Us About Iran and Israel" but you didn't talk much of anything about Israeli trade. Maybe that's because they. like the nation they control (America), want nothing more than to bully and bomb to get what they want, knowing full well all their puppets around the world will clap and cheer. Bullies eventually run into a bigger bully and get themselves thoroughly thrashed. For America, this will likely be China. Israel will not learn until someone sneaks a dirty bomb inside one of their cities and sets it off. Neither country will learn until it is too late.
To think America, which was founded on the idea with trading with as many countries as it may be possible and to avoid entangling alliances has endorsed quite the opposite path.
As a final aside, Russia must be wondering how their invasion to keep their next door neighbor, Ukraine, out of NATO and protecting Russian-speaking Ukrainians is bad but Israel bombing Iran is wonderful and great. The hypocrisy of the West/US is on full display.