Krugman paints the worst case scenario in continued oil disruption. The current price of a barrel of oil - as he explains - is largely speculative. The oil that left the Gulf at the start of the war is only now getting to East Asia. In other words, the actual reduction in the supply of oil really hasn't hit yet. The price increases we are seeing are based the mostly reasonable assumptions about what the price of oil will look like if the war continues.
There are two looming problems.
The first is that even if Trump could extract himself from this problem of his own making, the supply of oil would remain reduced for months, as damaged Gulf facilities come back online. Additionally, that transportation lag means that the weeks it takes for Gulf oil to get to Asia means that the current void in shipping will last weeks.
The second is that Trump appears to be doubling down on this insanity by sending just enough troops to make it worse without resolving anything. If he launches an attack on Kharg Island, the disruption in oil supplies will continue well into 2027.
Once that happens, we could be looking at chained inflation. That was the condition in the 1970s, whereby the price of, well, every output was set in anticipation of where the price of inputs would be. During this latest inflationary period around Covid, everyone assumed that conditions would return to normal, so they didn't want to raise prices too much and drive away customers. If you learn that prices will remain high for months or possibly years, then you raise prices by a lot in June in anticipation of the higher prices in November.
The problem is that this creates the upwards spiral of inflation that can only be cured by recessionary monetary policy.
Great job, Donnie.
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