The price of almost peace

Brent crude slipping below $90 a barrel on Tuesday ought to have offered an inflation-weary world some relief. Instead, Wednesday brought another reminder of how little control Washington now exercises over the consequences of its own war.

Oil rebounded above $92 after Iran ruled out surrendering its enriched nuclear material, while tankers continued to face attacks in the Strait of Hormuz. Donald Trump may have paused major strikes, but the oil market has clearly not received a stand-down order.

That is the trouble with this peculiar no-war, no-peace arrangement: the fighting persists, while nobody seems to know what would constitute an ending. After the Republicans’ midterm drubbing, Trump has compelling political reasons to avoid another escalation.

Yet the conflict he launched alongside Israel in February has acquired a momentum of its own. Gulf governments want restraint, Qatar and Pakistan are helping mediate, and US forces are still building up in the region. Is Washington pursuing an exit, or merely hoping an awkward war will be considerate enough to wait until the politics improve?

The oil market is being asked to regard an extraordinary emergency as an acceptable operating environment. Brent has fallen more than 20 percent from its October 30 peak of $118, largely as traders discount another major escalation. Gulf exports have recovered impressively.

According to Kpler, an energy-shipping data company, flows through Hormuz have averaged 10.5 million barrels a day since early October, against 13.5 million before the war. Including alternative routes, Gulf crude exports are nearly back to their pre-war level.

Reassuring, perhaps, until one asks why getting there requires naval escorts, restricted passages and increasingly inventive shipping arrangements.

Freight and insurance costs remain around ten times their pre-war levels. Attacks on vessels continue despite the fall in crude prices, while energy installations and coastal waters have suffered damage. Ship owners can reroute tankers, insurers can increase premiums and producers can patch up infrastructure. All these adjustments cost money, which eventually finds its way into freight bills, production costs and consumer prices.

Financial markets can erase a risk premium in minutes; repairing the physical and commercial damage will take rather longer. The oil price may fall on the promise of peace, but the bills continue to arrive.

The distinction is becoming especially uncomfortable for the Federal Reserve. US consumer prices rose 0.4 percent in October, exceeding forecasts, while core prices increased 0.3 percent. The more disturbing development is that inflation has spread beyond energy.

Tariffs, domestic demand and investment spending also contribute, so attributing the entire problem to the war would be too convenient. But the energy shock has made monetary policy harder, and lower crude prices cannot immediately unwind months of expensive diesel, freight and disrupted refining.

Fed Governor Christopher Waller has raised the possibility of a 50-basis-point rate increase in December, while Dallas Fed President Lorie Logan has suggested that tightening may need to accelerate.

Markets have fully priced in a quarter-point rise, with the debate now extending to how much further the Fed must go. For a White House presumably eager to claim credit for cheaper oil, the prospect of more expensive credit is an unfortunate complication. Can an administration really declare victory over inflation when the institution charged with fighting it is discussing bigger rate increases?

Bond investors have already offered an answer, although their language tends to be less diplomatic. The US 10-year Treasury yield briefly crossed 5 percent on Tuesday before easing towards 4.99 percent, while the two-year yield jumped more than 18 basis points. A weak Treasury auction compounded the selling. Just days earlier, investors had hoped that Democratic control of Congress might restrain fiscal excess and favour bonds.

Now those hopes are colliding with sticky inflation and renewed expectations of Fed tightening. Congressional gridlock may impede legislation, but the bond market has yet to discover a legislative procedure for suspending inflation.

Nor does the discomfort stop at Wall Street. Asian government bond yields rose on Wednesday, with Japan’s 10-year yield approaching 2.8 percent and Australia’s moving above 5 percent. Higher US yields strengthened the dollar, pressuring major currencies and complicating the outlook for economies dependent on imported fuel and dollar financing.

Pakistan would certainly welcome cheaper crude, but how generous is that relief if shipping stays expensive, the dollar firm and global borrowing costs elevated?

Even the artificial-intelligence investment boom is feeling the squeeze. Data centres demand enormous capital and electricity, often on the assumption that financing will remain available at tolerable rates. Higher yields challenge that arithmetic just as investors question whether expected AI profits justify the spending. A conflict around Gulf shipping routes can therefore influence the valuation of technology businesses thousands of miles away.

The supply chain connecting oil tankers to silicon chips is turning out to be longer, and rather less abstract, than the market’s favourite growth narratives suggest.

And Trump’s choices remain thoroughly unappealing. Renewed strikes could send oil sharply higher and compound his political troubles. A settlement that leaves Tehran’s central nuclear demands intact could invite accusations that nine months of fighting have achieved little.

Preserving the present limbo, meanwhile, asks the world to pay a continuing surcharge for an emergency nobody is prepared to call over. The midterms may have changed Washington’s political arithmetic, but the financial arithmetic refuses to cooperate.

Perhaps that is the sharpest irony of this expensive pause. The president can afford to reconsider his next move; central bankers, ship owners, businesses and households cannot afford to put their decisions on hold.

The White House may be waiting for a better moment to decide what comes next. But how long can the rest of the world be expected to finance that wait?

Copyright Business Recorder, 2026