Faulty reasoning signals

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Longtime readers know that I’m intensely skeptical of much of the “resiliency” basis for new U.S. industrial policy and protectionism. Since the pandemic, my reaction to almost all “supply chain crises”—hitting food, energy, minerals, and other essentials—has been a big yawn, owed mainly to the long history of open and dynamic economies (and the millions of people independently acting therein) quickly adjusting to whatever the world and its politicians throw in our way. Yet even I must admit that the Iran war—and the broad and significant shock to critical commodities largely made in the Middle East—worried me in its early days. As I wrote back in March, there were increasing signs and broad agreement that, if the war dragged on into May or June, the economic fallout would be significant—and extend well beyond the gas pump.

Four months later, I’m happy to admit I was too pessimistic. Yes, real damage occurred, some of it will linger, and things could deteriorate now that hostilities have seemingly resumed. But the global economy’s response to what the International Energy Agency has called “ the largest supply disruption in history ” has been much more impressive than most analysts expected, leaving me much less concerned about what lies ahead. It’s both a useful reminder that global markets are incredibly powerful things—if governments allow them to operate—and a new indication that we shouldn’t use a once-in-a-lifetime pandemic to guide U.S. “resiliency” policy.

Crude oil tankers, bulk carriers, and vessels sit anchored around Qaboos Port on June 22, 2026, in Muscat, Oman. (Photo by Elke Scholiers/Getty Images)

Let’s start with the obvious: crude oil.

When U.S. and Israeli strikes began on February 28, the quick closure of the Strait of Hormuz took out around a fifth of the world’s crude oil supply—10 million-plus barrels a day—overnight. Markets justifiably panicked, with benchmark crude prices in the U.S. and abroad quickly exceeding $100 per barrel, and prices for physical (“delivered”) cargoes going even higher. Gasoline prices soon followed, hitting a U.S. record in mid-May (and causing many a Republican major heartburn). With no resolution to the war in sight, many industry insiders—not point-scoring politicians and pundits—warned that things would get much worse as time passed and local inventories dwindled.

It didn’t play out that way. Even before the official ceasefire memorandum of understanding (MOU) was signed on June 17—and despite the continued closure of the Strait of Hormuz—oil prices trended downward throughout May and early June. Even after hostilities renewed this week and President Donald Trump claimed the deal was off, Brent hovered below $80 a barrel—not even $10 more than where it was before the war started.

A new report from the IEA details how the worst was avoided—and it’s pretty much what Econ 101 would predict. Along with some excess supply being in the market before war broke out, the organization identifies three major reasons why global oil prices didn’t skyrocket.

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First, there were large releases from private storage “as oil prices incentivised market participants to draw down inventories at record rates.” Governments and the IEA also pushed emergency stockpiles into the market. Collectively, global oil inventories have added around 3.8 million barrels per day to global supplies since the war broke out.

Second, oil producers responded to the shock with crude output and sales that avoided the conflict zone. Saudi Arabia and the United Arab Emirates, for example, utilized alternative transportation routes—like the Saudis’ East-West pipeline—to bypass the strait and boost non-Hormuz oil exports by several million barrels per day.

Adding to these flows were non-Gulf oil exporters, especially the United States:

The increases in oil shipments from the United States to international markets have been the most remarkable. Total crude and petroleum product exports from the United States surged to a record high of 13.1 million barrels in May, up by nearly a quarter from the same month a year earlier. The crude exports were supported by higher production, as well as the drawdown of industry and government stocks, providing significant support for global supplies amid the turmoil.

Refiners in the U.S. and Africa also boosted output and exports, especially for jet fuel to Europe—avoiding the dire consequences that many airline analysts predicted.

Third, consumers around the world adapted. Most obviously, people and firms reduced their purchases of crude oil and refined products (e.g., by driving less or switching to energy alternatives)—what economists call “demand destruction.” Chief among the drivers here was China, a massive energy importer that— thanks to a multitiered stockpile system, increases in alternative energy generation (clean and dirty), a still-sputtering domestic economy, and curbs on industrial oil consumption— unexpectedly “cut purchases by about 4 million barrels a day from usual levels since the Iran war broke out in late February,” thus helping to “balance global supply and demand and cap prices below $100 a barrel.”

(Let us now pause for a moment to gawk at the grim irony: What was billed as a war actually intended to kneecap energy-dependent China has instead revealed that Beijing is stronger than expected and just helped save Trump’s political bacon .)

Overall, the IEA now estimates that “global oil demand will drop by almost 5 million barrels per day in the second quarter of 2026 year-on-year, and by 1.1 million barrels per day on average for the full year”—compared with its pre-war forecast of global demand growth of 850,000 barrels per day for 2026. And the agency just warned of a 2027 supply glut , a remarkable turn from March’s talk of the “greatest global energy security challenge” in history. Maybe that prediction will change in the days ahead, but—for now at least—few oil traders seem to think so.

Other moves were also important on the margins. Smuggling of Iranian oil, for example, proliferated during the U.S. blockade of Hormuz, thanks to a “ shadow fleet ” of already-full tankers—and an entire shadow economy to support them—that emerged in recent years to avoid Western sanctions. Governments made other policy adjustments to smooth markets and temper prices, beyond releasing emergency stockpiles (and jawboning markets). Most notably, the Trump administration waived the Jones Act for an unprecedented 150 days, thus boosting U.S. energy supplies (and security) by allowing foreign-flagged vessels to move American-made crude, refined products, and fertilizer between U.S. ports. So far, the waiver has allowed tens of millions of barrels and dozens of voyages that would’ve been banned by law in nonwaiver times.

Few, if any, of these adjustments were costless—trade-offs always exist—and the market remains fragile. But even with the conflict still percolating, the doomsday scenario that many smart, nonpartisan eggheads predicted simply never materialized.

And the reason is textbook stuff: A massive supply shock triggered a dramatic increase in prices that was based on the expectation of reduced future supplies. Those high prices signaled to the rest of the world to supply more—by pump, export, or stockpile—and/or consume less. And, because crude oil is an easily transportable commodity traded on a global market that’s relatively transparent and free (and, thanks to liberalizing moves like Trump’s Jones Act waiver, made even freer after the shock hit), prices remained well below what most experts predicted based on an educated—but static—view of existing supply and demand patterns.

Similar adjustments happened elsewhere.

Oil was the biggest, most visible adjustment story, but it was hardly the only one. American farmers responded to spiking fertilizer prices—a 25 to 30 percent increase for nitrogen-based urea and ammonia—by shifting some of their acreage toward less fertilizer-intensive crops. The USDA’s Prospective Plantings survey has thus found that corn and wheat acreage, the most nitrogen-hungry crops, are down roughly 3 percent from 2025, while acreage for less demanding soybeans is up about the same amount (4 percent).

Then there’s aluminum, supplies of which were hit by both the Hormuz closure and related Iranian strikes on Middle Eastern smelters. The U.S. Midwest Premium (the markup we Americans pay for primary aluminum over the global price) hit fresh records as domestic supplies shrunk, but scrap aluminum and global recyclers stepped into the breach. Thus, European scrap exports jumped nearly 75 percent in March, and U.S. scrap imports rose 24 percent, as tariff-exempt recycled metal offered a solution that tariffed primary aluminum couldn’t.

Helium was another chokepoint after a giant producer in Qatar went offline. But cash-flush Asian semiconductor producers responded by diversifying their foreign suppliers and tapping “extensive helium storage caverns and onsite inventories” to keep their factories running full tilt. Global sulfur supplies—needed to make fertilizer and various electronic goods—were boosted by Chinese copper producers ramping up imports and processing of sulfur-rich pyrite (aka fool’s gold) “to capitalize on a price rally fueled by the Iran war, which has disrupted shipments from the Gulf, which typically supplies about half of the world’s seaborne sulfur.”

The list goes on and on—and these are just the market adjustments we know about. Many others, invisible to almost everyone, occurred daily in response to prices and other market signals. They never made a headline because nothing dramatic happened … and that, of course, is very much the point.

Lessons learned? I doubt it.

So, in response to a global supply shock that worried even a shoulder-shrugger like me, markets adjusted quickly. And, even with bombs flying and the ceasefire apparently scuttled, oil prices have climbed just a few percentage points from their July lows. From this nonevent we can draw several lessons.

First, high prices for oil and other commodities did their job (whether politicians liked it or not). These clear signals simultaneously encouraged more supply and less consumption from millions of people reacting with localized knowledge in expected and unexpected ways. This result surely isn’t novel, but it’s worth emphasizing today because so many cases for industrial-policy and other resiliency strategies presume static, fragile markets—and often single “nations” acting therein—that must be planned into submission, lest the worst happen. The Iran war is yet another data point suggesting otherwise—assuming prices are allowed to work.

Second, a key part of “resiliency” policy is freeing markets, not blocking or controlling them. A recurring subplot in the Iran episode (and several others like it) has been policymakers, including the protectionist Trump administration, discovering that trade and other supply-side restrictions were compounding an energy crisis they were trying to manage—and then suspending some government barriers (e.g., the Jones Act or oil sanctions) to boost supply, remove inefficiencies, and temper prices. Recent events don’t necessarily argue that there’s no role for government action in managing supply shocks—stockpiles have clearly played a role here, too—but Washington’s Iran response is a vivid, counterintuitive illustration of how open trade and freer markets are a huge benefit during “supply chain crises.” And they produce results that are faster, cheaper, and better—especially in the longer term—than what could be achieved by “emergency” measures like price controls, trade (import or export) restrictions, subsidies, or other interventions that have been proposed since the war broke out.

All too often, the biggest resilience threats are self-inflicted , and markets can absorb a lot of punishment as long as governments get out of the way.

Finally, the Iran episode has me increasingly confident that Washington policymakers really need to stop using the pandemic as an appropriate guide for setting future U.S. supply chain resiliency policies. In retrospect, the pandemic era was historically unique in terms of its scale and depth: It didn’t just take a chunk of global supply or demand offline; it took everything offline all at once (and closed borders too). Then, governments sporadically and unpredictably reopened and closed markets and borders repeatedly—and at varying times and speeds—for the next nine months or longer. It was, thankfully, a once-in-a-lifetime disaster.

Iran, on the other hand, has been a more conventional shock: a large, sudden, and concentrated—in terms of geography and products—supply disruption that market participants and governments could analyze, price, and mitigate using conventional tools (storage, diversification, substitution, conservation, innovation, etc.). As a result, the war has been economically costly—and in my view very misguided—but it hasn’t been catastrophic, even though it was literally the biggest energy shock ever . And it shows that a model of “supply chain resilience” calibrated to the pandemic is one that treats a 100-year flood like an annual thunderstorm, potentially imposing massive and needless costs to respond to a scenario that never repeats.

Maybe, I dunno, we shouldn’t do that .

None of this should be read as a defense of the war or as minimizing the real economic costs it has imposed. But in terms of what globalized, open markets can absorb without breaking, the last four months have been a remarkable lesson. Will anyone in Washington learn it?

A new study adds to the growing pile of econ literature showing that AI is actually boosting jobs in the industries that disproportionately adopt it: “In a sample covering more than 21,000 U.S. firms, we find that companies that invest heavily in AI grow headcount 10% over the two years following adoption. Entry-level headcount grows 12%.” Jevons paradox is real, folks.

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Disclaimer: The opinions expressed above do not necessarily reflect those of the presenting sponsor.

Scott Lincicome is an author of the Dispatch Markets newsletter, vice president of general economics and trade at the Cato Institute, and a visiting lecturer at Duke University Law School. He wrote the Capitolism newsletter at The Dispatch from 2020 through 2026.

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The Global Economy Has Bested the Iran Mess—So Far

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