Trump’s One Big Beautiful Bill Act Mortgages America’s Economic Future

Economic

Forex

Summary:

The falling out between US President Donald Trump and Elon Musk, a onetime fixture at the White House, has abated for now. But one of the key factors that sunk the relationship remains: the One Big Beautiful Bill Act (‘OBBB’), condemned by Musk as an ‘abomination’ that will result in ‘crushing’ debt, is proceeding through Congress.

Proponents tout the bill as the most consequential in US history, but Musk is right to point out its risks. His focus on fiscal irresponsibility is warranted, but only illuminates part of the lasting damage the OBBB could cause to US economic foundations.

As written, the bill delivers or extends expansive tax cuts, including campaign promises on tip and overtime income. It also launches new child savings accounts, and bolsters immigration enforcement and military spending. Offsetting its price tag are unprecedented benefit cuts that will strip millions of health coverage and nutritional support. All told, the OBBB in its current form renders the poorest Americans worse off while funnelling the bulk of its benefits to the top quintile, and disproportionately to the richest.

Beyond this accounting, however, other facets of the bill deserve special scrutiny. Its fiscal cost, the threat it presents to foreign investment, and the clean energy rollback it pursues threaten lasting damage to US economic dynamism and competitiveness.

The debt ‘bomb’

The OBBB’s immense debt burden – $2.4 trillion over a decade – has elicited concern across the ideological spectrum, even as the White House argues it strengthens the nation’s fiscal trajectory.

Even before the OBBB, the US spent more on interest payments – over $1 trillion last year – than national defence. Adding lavishly to the national debt when interest rates are high and unemployment low is deeply irresponsible and could push the fiscal burden to alarming heights, increasing borrowing costs for consumers and businesses. The OBBB is, in the words of Republican Congressman Thomas Massie, a ‘debt bomb ticking’. But many of his peers remain unconvinced, instead holding fast to expectations of an economic boom.

The crux of the fiscal debate is the recurring claim that tax cuts spur adequate economic activity to pay for themselves. OBBB’s proponents have embraced this notion, disproven time and again, even as reputable independent analyses find to the contrary. With the World Bank trimming the outlook for the US economy due to policy uncertainty and trade barriers, achieving the promised growth is increasingly improbable.

Investor unease

This fiscal expansion lands amid investor unease. Moody’s May downgrade of US debt and April’s bond market jitters add to other warning signs that investors are reconsidering the appeal and safety of dollar assets. Heightened fiscal pressures will leave the nation vulnerable to external shocks and hamstring its capacity to make transformational economic and security investments.

An obscure provision, Section 899, threatens to further alienate foreign investors by creating a retaliatory tax on individuals and entities from nations imposing ‘unfair’ digital services or profit-shift taxes – countries supplying more than 80 per cent of US foreign direct investment (FDI).

Foreign investors’ expansive US holdings – roughly 20 per cent of equities, 30 per cent of Treasuries, 30 per cent of corporate credit, and significant FDI – catalyse US job creation, growth, and innovation. The OBBB threatens this advantage, risking outflows that would harm US businesses, workers, and investors.

Treasury Secretary Scott Bessent maintains that Section 899 empowers the US to reassert tax sovereignty where other countries overreach. But, in the context of the administration’s unilateral economic agenda (including tariffs), it looms as another coercive tool that could ‘transform a trade war into a capital war’. Even if the tax is never imposed – let alone reciprocal retaliation – its passage could chill investment, by calling into question the fundamental openness of the US system.

Clean energy rollback

A final threat to US competitiveness is the OBBB’s rollback of clean energy incentives as US energy demand surges.

Hobbling clean energy development could needlessly constrain supply and force suboptimal policy decisions, especially given the huge energy demands of AI and data centres. Indeed, Trump’s eagerness to strike deals during his May visit to the Gulf attests to energy’s strategic potency in the AI context.

Panned by its detractors as market-distorting giveaways, the Biden administration’s 2022 Inflation Reduction Act subsidies sparked a wave of energy investments, with the bulk of projects located in Republican-held districts.

But the OBBB threatens incentives for businesses and households alike, including those for EVs, which Musk reportedly fought to save. By repealing and restricting tax credits for clean electricity production and investment, the bill undermines renewable energy development and financing. Complex restrictions on relationships with foreign entities would further harm investment.

The current administration has sidelined climate priorities. But ensuring energy security and domestic production remain paramount, especially as US oil and gas producers face challenging market dynamics. The administration acknowledges as much, in particular in its push to build nuclear energy, which has a crucial role to play. But even an aggressive buildout would take years to bring substantial new capacity online.

In the intervening years, undermining rapid deployment of renewables could constrain energy supply and drive up energy costs.

Likewise, withdrawing support from nascent sectors like enhanced geothermal is profoundly short-sighted, allowing rivals to seize a strategic advantage as China did with solar production, sacrificing US deployment prospects and future export leadership. The rollback pulls against the administration’s own energy dominance objectives and chills innovation, with ripple effects into other sectors.

Congressional jockeying is far from over. The OBBB’s reliance on ‘reconciliation,’ which allows Republicans to pass a bill without Democratic support, means a small group of legislators can wield outsize influence. Consternation is building within the Republican caucus and lobbying groups, and tweaks are likely to emerge on energy subsidies and Section 899, which could mitigate some risk.

Material changes to the fiscal impact, however, will be difficult given factional disputes over various tax and benefit provisions, though some lawmakers have signalled opposition that could delay the bill.

Still, the OBBB’s general shape is set. With pressure for a legislative victory mounting, it is a must-pass politically for Republicans. Failure to do so before the expiration of Trump’s first term tax cuts would lead to higher rates.

It is also a must-pass for another urgent reason – the need to lift the fast-approaching debt ceiling and avoid default. Absent action to do so, the Treasury will no longer be able to meet its obligations in the coming months, inviting unprecedented catastrophe. Even approaching the deadline could spook markets.

Ultimately, the OBBB’s fiscal irresponsibility, discouragement of foreign investment, and damage to energy innovation would sap American economic strength. As Congress wrangles over the bill’s details and Trump and Musk’s feud fades, it remains to be seen what of consequence will endure, and at what cost to whom. All eyes are now on the Senate, to see if it tempers the bill’s most reckless excesses.

Source: Chatham House

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Gerik

Middle East Situation

A Dire Warning from Trump as Conflict Deepens

In the aftermath of Israel’s unprecedented aerial assault on Iran’s nuclear facilities and military figures, President Trump used social media to urge Iran to return to the negotiating table to avoid further violence. His message comes as Israel claims to have deployed 200 aircraft in strikes across multiple Iranian cities, targeting more than 100 strategic locations including the Natanz nuclear site. The U.S. President warned that additional attacks had already been planned and could be even more destructive if Iran failed to make concessions swiftly.

Trump’s statements mark a shift from his earlier commitment to diplomacy. Just one day prior, he had emphasized a desire for peaceful resolution, suggesting his administration was “committed to a Diplomatic Resolution.” However, he now frames the situation as a choice for Iran between escalation or negotiation.

Iran Retaliates as Regional Tensions Spike

In response, Iran launched waves of drones toward Israel, with some intercepted over Jordan, and more retaliation anticipated. Israeli sources indicated expectations of ballistic missile attacks as well. The strikes resulted in several explosions in Tehran, Natanz, and other cities, with Iranian media confirming the deaths of top military leaders including IRGC commander Hossein Salami and Chief of Staff Mohammad Bagheri.

Despite the destruction, the International Atomic Energy Agency (IAEA) reported no signs of radiation leakage from the Natanz facility, suggesting that Israel’s attacks, while significant, may not have compromised the fortified core of Iran’s nuclear stockpile.

Diplomacy at a Breaking Point

The scheduled nuclear talks in Oman now hang in the balance. Iran’s Supreme Leader Ayatollah Khamenei vowed revenge, warning that Israel would “pay a very heavy price.” Meanwhile, Arab nations such as Oman, Saudi Arabia, the UAE, and Qatar criticized Israel’s actions, labeling them as reckless and threatening to regional stability.

European leaders, including UK Prime Minister Keir Starmer, also urged de-escalation. Yet diplomatic progress appears fragile, especially with rising public and political pressure within Israel and Iran to maintain a hardline stance.

Markets React: Oil, Gold, and Treasuries Surge

Markets reflected the geopolitical shock, with Brent crude spiking over 8% to $75 per barrel before stabilizing. Investors also poured into traditional safe havens like gold and U.S. Treasuries, underscoring broader fears of a prolonged and unpredictable conflict in the Middle East.

Despite Iran stating that its oil infrastructure was undamaged, fears of supply chain disruptions contributed to the volatility. As the world’s fifth-largest oil producer, Iran’s energy sector remains a critical node in global price stability.

Strategic and Political Ramifications for the U.S.

While Trump denied direct U.S. involvement in the strikes, Secretary of State Marco Rubio confirmed American forces were on alert and warned Iran against retaliating against U.S. personnel or assets. Notably, some U.S. embassy staff in Baghdad were ordered to evacuate, anticipating spillover risks.

Republican lawmakers mostly backed Israel’s move, calling it a justified preemptive strike, while Democrats such as Senator Jack Reed criticized the action as reckless and called for urgent diplomatic intervention.

The airstrikes represent a dramatic escalation compared to previous Israeli actions, which had avoided nuclear targets. For the first time, Israel has directly attacked sites central to Iran’s uranium enrichment program—long regarded as red lines due to their existential threat potential.

Iran’s Nuclear Program at a Crossroads

Tehran insists its nuclear ambitions are peaceful, aimed at civilian energy needs. However, uranium enrichment has expanded rapidly since Trump withdrew from the 2015 nuclear agreement. Last week, Iran revealed plans for a new enrichment facility, prompting criticism from the IAEA and paving the way for potential U.N. sanctions.

This deepening crisis not only threatens diplomatic progress but also sets the stage for a renewed debate over how best to prevent nuclear proliferation in the region—through military deterrence, economic sanctions, or revived multilateral talks.

The Israeli strikes, coupled with Trump’s ultimatums, may corner Iran into a binary choice between negotiation and intensified conflict. However, the regional fallout and lack of a coordinated diplomatic path forward pose severe risks. As military action expands and trust erodes, the window for peaceful resolution narrows—leaving the Middle East, and global energy markets, exposed to a volatile summer ahead.

Source: Bloomberg

Risk Warnings and Disclaimers

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Michelle

Commodity

Political

Gold prices are solidly up and hit a five-week high in early U.S. trading Friday, on strong safe-haven demand following the overnight Israeli attacks on Iran that are being called major. Silver prices are modestly up. August gold was last up $41.90 at $3,444.30. July silver prices were last up $0.095 at $36.39.

Risk aversion in highly elevated Friday amid the most severe military escalation between Israel and Iran in decades. Targeted Israeli airstrikes overnight killed several of Iran’s top generals and nuclear officials, paralyzing Tehran’s command structure and leaving the regime reeling. Israel said it is preparing for further military action.

Gold prices rose to a five-week high and crude oil prices surged after Israel launched a wave of military strikes against Iranian nuclear and missile sites, raising fears of a broader Middle East conflict that could severely disrupt global energy supplies.

In a post on Truth Social, Trump declared, “Iranian leaders didn’t know what was about to happen. They are all DEAD now, and it will only get worse! There has already been great death and destruction, but there is still time to make this slaughter, with the next already planned attacks being even more brutal, come to an end. Iran must make a deal, before there is nothing left, and save what was once known as the Iranian Empire.”Asian and European stocks were mostly lower overnight. U.S. stock indexes are pointed to sharply lower openings today in New York.

The key outside markets today see the U.S. dollar index solidly up. Nymex crude oil futures prices are sharply higher, hit a five-month high and trading around $74.00 a barrel. The yield on the benchmark 10-year U.S. Treasury note is presently at 4.34%.

U.S. economic data due for release Friday is light and includes the University of Michigan consumer sentiment survey.

Technically, August gold futures bulls have the solid overall near-term technical advantage. Bulls’ next upside price objective is to produce a close above solid resistance at last week’s high of $3,427.70. Bears' next near-term downside price objective is pushing futures prices below solid technical support at $3,250.00. First resistance is seen at the overnight high of $3,467.00 and then at $3,477.30. First support is seen at $3,400.00 and then at Thursday’s low of $3,358.50. Wyckoff's Market Rating: 8.0.

July silver futures bulls have the solid overall near-term technical advantage. Prices are trending higher on the daily bar chart. Silver bulls' next upside price objective is closing prices above solid technical resistance at $40.00. The next downside price objective for the bears is closing prices below solid support at $34.00. First resistance is seen at this week’s high of $37.03 and then at $37.50. Next support is seen at $36.00 and then at this week’s low of $35.58. Wyckoff's Market Rating: 7.5.

Source: Kitco

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Gerik

Economic

Easing CPI and Trade Progress Stabilize Equity Fund Flows

Investors showed signs of renewed confidence in U.S. markets, evidenced by the smallest weekly equity fund outflow in a month. According to LSEG Lipper data, U.S. equity funds saw net redemptions of just $212 million for the week ending June 11—a sharp improvement from previous weeks, driven largely by two key macroeconomic developments: cooler-than-expected consumer price index (CPI) figures for May and tentative progress on a U.S.-China trade accord.

This shift marks a reversal from the significant equity sell-offs observed earlier in the year, reflecting reduced anxiety over potential interest rate hikes and protectionist shocks. The May CPI print helped ease fears of persistent inflation, reinforcing expectations that the Federal Reserve may stay on hold or even pivot to rate cuts later in the year.

Sectoral Funds Lead with Targeted Inflows

While overall equity fund flows remained slightly negative, U.S. sector-specific funds attracted considerable investor interest. Communication services, financials, and industrials led the gains, pulling in $529 million, $399 million, and $388 million, respectively. These sectors often perform well when economic sentiment stabilizes, as they tend to benefit from improved consumption, lending, and infrastructure activity.

In contrast, broader market exposure through large-cap, mid-cap, and small-cap segments continued to experience net redemptions, with outflows of $2.65 billion, $1.35 billion, and $100 million respectively. This disparity suggests that investors are opting for more targeted exposure over general market allocation, possibly to mitigate perceived downside risks.

Bond Funds and Yield-Hungry Investors Show Strength

U.S. bond funds extended their winning streak to an eighth consecutive week, attracting $4.08 billion in net new capital. The inflows were concentrated in short-to-intermediate investment-grade corporate bonds ($2.37 billion), government and Treasury funds ($1.02 billion), and municipal debt ($523 million). The persistence of bond inflows points to investors continuing to seek relative safety and predictable income, particularly as expectations mount for potential Fed easing later this year.

This trend is aligned with the view that bond markets are pricing in a plateau or even a decline in interest rates, particularly with inflation readings becoming more subdued. These allocations also highlight investor demand for assets with defensive characteristics in a still-uncertain macroeconomic landscape.

Money Market Funds See Profit-Taking After Spike

In a noteworthy shift, money market funds recorded net outflows of $15.18 billion, partially unwinding the massive $66.24 billion in inflows from the previous week. This suggests that investors may be reallocating capital from ultra-liquid holdings into higher-yielding or more opportunistic assets such as bonds and select equities. The move may also reflect positioning ahead of the upcoming Federal Reserve meeting, with some investors anticipating reduced short-term rate pressure.

The combination of a softer inflation outlook and tentative trade stability appears to have triggered a pause in broader equity fund withdrawals. However, the uneven flows between general equity segments and specific sectors, along with robust bond inflows, suggest that investors remain cautious and selective. The upcoming Fed meeting will likely determine whether this cautious optimism turns into a more sustained rotation back into risk assets or if further defensive repositioning will be necessary.

Source: Reuters

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Warren Takunda

Commodity

Economic

Middle East Situation

Oil surged, stocks fell and investors sought safety in the U.S. dollar and government bonds Friday after Israel struck Iranian nuclear and military targets in an attack that raised the risk of war between the two countries and broader instability in the Middle East.

Futures for the S&P 500 fell 0.9% before the opening bell, while futures for the Dow Jones Industrial Average were down 1%. Nasdaq futures slid 1.1%.

U.S. benchmark crude oil rose by $4.73, or 6.9%, to $72.77 per barrel, its biggest gain since the early days of Russia’s attack on Ukraine more than three years ago. Brent crude, the international standard, climbed $4.58 to $73.94 per barrel, also the largest single-day jump since the Russian invasion.

Oil prices are likely to rise in the short term but the key question is whether exports are affected, said Richard Joswick, head of near-term oil at S&P Global Commodity Insights. “When Iran and Israel exchanged attacks previously, prices spiked initially but fell once it became clear that the situation was not escalating and there was no impact on oil supply,” he wrote in an emailed analysis.

“Oil price risk premiums could rise sharply if Iran conducts broader retaliatory attacks, especially if on targets other than in Israel,” Joswick said.

China is the only customer for Iranian oil but could seek alternative supplies from Middle Eastern exporters and Russia, he said.

Iran’s oil trade is restricted by Western sanctions and import bans, and Israel exports only small amounts of oil and oil products.

Boeing shares are down 1% after falling nearly 5% Thursday when one of the aerospace giant’s planes crashed in India, killing all but one of the 242 people on board as well as several on the ground. The plane operated by Air India was the first fatal crash of a Boeing 787 Dreamliner since it went into service in 2009.

The cause of the crash is unknown.

GE Aerospace, which makes engines for Boeing, is down close to 2% after it announced it was postponing next week’s investor day in light of the tragic crash.

In Europe at midday, Germany’s DAX dropped 1.3% and the CAC 40 in Paris gave up 0.9%. Britain’s FTSE 100 slipped 0.2%.

The yield on the 10-year Treasury fell to 4.35% from 4.41% late Wednesday and from roughly 4.80% early this year.

In currency trading early Friday, the U.S. dollar rose to 144.12 yen, while the euro eased to $1.1511. The yield on U.S. 10-year Treasurys fell to 4.35%. Bond yields and prices move in opposite directions.

Treasurys and the dollar often rise when investors feel less inclined to take risks.

Coming later Friday is the University of Michigan’s consumer sentiment report.

Next week brings the Federal Reserve’s two-day policy meeting where it will make a decision on its benchmark interest rate. The nearly unanimous expectation on Wall Street is that the U.S. central bank will stand pat again.

The Fed has been hesitant to lower interest rates, and it’s been on hold this year after cutting at the end of last year, because it’s waiting to see how much President Donald Trump’s tariffs will hurt the economy and raise inflation.

In Asia, Tokyo’s Nikkei 225 fell 0.9% to 37,834.25 while the Kospi in Seoul edged 0.9% lower to 2,894.62. Hong Kong’s Hang Seng retreated 0.6% to 23,892.56 and the Shanghai Composite Index lost 0.8% to 3,377.00. Australia’s S&P/ASX 200 drifted 0.2% lower to 8,547.40.

“An Israeli attack on Iran poses a top ten of our global risk, but Asian markets are expected to recover quickly as they have relatively limited exposure to the conflict and growing ties to unaffected Saudi Arabia and the UAE,” said Xu Tiachen of The Economist Intelligence.

Source: AP

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Gerik

Economic

China–U.S. Trade War

Fed Poised to Pause Amid Murky Trade and Growth Signals

With the federal funds rate currently set at 4.25%-4.50%, the Federal Reserve is widely expected to leave interest rates unchanged during its June 17–18 meeting. While recent inflation data suggest progress toward the 2% target—particularly when excluding volatile food and energy prices—Fed officials remain hesitant to pivot aggressively. The central bank’s challenge now lies not just in inflation but in interpreting the broader consequences of U.S. trade policy and fiscal risks.

President Donald Trump’s tariff-driven trade approach and a large budget and tax proposal still in flux continue to cloud the economic outlook. Though the administration postponed a new wave of global tariffs until next month, the policy overhang contributes to what Fed Chair Jerome Powell once described as a justification for “inertia”—waiting for clarity before shifting policy direction.

Mixed Signals: Inflation Slows, But Risks Remain

Recent data show both consumer and producer prices rose less than expected in May, easing concerns that tariffs would lead to an inflationary spike. The core PCE price index, the Fed’s preferred gauge, has hovered near 2% over the past three months, bolstering the argument for eventual rate cuts. Meanwhile, unemployment has stabilized at 4.2% for three consecutive months, suggesting that the labor market, while not accelerating, remains resilient.

Nonetheless, policymakers appear divided over the weight to assign these developments. While the March projections pointed to two rate cuts in 2025, some analysts—such as Tim Duy of SGH Macro Advisors—believe that due to the passage of time and lingering uncertainty, the updated forecast may downgrade to a single rate cut this year unless more dovish sentiment takes hold.

Tariffs: Inflation Catalyst or Demand Dampener?

A key debate is whether tariffs will exert more upward pressure on prices or act as a drag on consumer demand. The retail sales data for May, due just before the Fed’s meeting, could shed light on this dynamic. Some economists, notably from Citigroup, argue that early signs of demand softening—potentially driven by consumers cutting back on services in response to higher imported goods prices—could keep inflation in check but risk triggering higher unemployment.

This creates a complex dilemma for the Fed: whether to prioritize inflation containment or to act preemptively in defense of labor market stability. As EY-Parthenon’s Gregory Daco put it, the Fed is likely to stick with a “cautious patience” narrative, reinforcing a wait-and-see posture in the absence of compelling evidence on either front.

Markets Lean Toward September as Rate Cut Start Point

Investor sentiment remains tilted toward rate cuts beginning in September. Fed funds futures continue to price in at least two cuts by year-end, though shifts in inflation or labor data could quickly adjust expectations. Goldman Sachs recently lowered its recession probability to 30% and sees modest inflation and growth improvements. Still, the bank expects summer inflation prints to delay Fed action until late 2025.

In contrast, Citi foresees a faster pivot, with cuts beginning in September and continuing into 2026, driven by persistent demand-side weakness. According to their view, “markets have yet to internalize” the possibility that inflation moderation will come at the cost of employment deterioration.

The June Fed meeting will likely underscore the central bank’s strategic dilemma. While inflation appears to be under control for now, the potential fallout from unresolved tariffs, a fragile global trade environment, and uncertain domestic fiscal conditions make any immediate move risky. The Fed's updated projections may hint at an eventual easing cycle, but the path forward depends heavily on evolving data—and clarity from policymakers in Washington. For now, "staying put" remains the prudent course.

Source: Reuters

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Glendon

Political

Commodity

The Strait of Hormuz, a narrow waterway at the mouth of the Persian Gulf, handles around 26% of the world’s oil trade and is rarely far from the center of global tensions.

Iran has targeted merchant ships traversing the choke point in the past, and has even threatened to block the strait. The route’s vulnerability was back in focus after Israel launched airstrikes targeting Iran’s nuclear facilities and killed senior military commanders, raising the risk of a wider regional conflict.

The UK had issued a rare warning to mariners days earlier, saying increased tensions in the region could impact shipping. Frontline Ltd., one of the world’s largest oil-tanker operators, said it would be more cautious about offering its vessels to haul cargoes from the Persian Gulf.

The waterway connects the Persian Gulf to the Indian Ocean, with Iran to its north and the United Arab Emirates and Oman to the south. It’s almost 100 miles (161 kilometers) long and 21 miles wide at its narrowest point, with the shipping lanes in each direction just two miles wide. Its shallow depth makes ships potentially vulnerable to mines, and the proximity to land — Iran, in particular — leaves vessels open to attack from shore-based missiles or interception by patrol boats and helicopters.

It’s essential to the global oil trade. Tankers hauled almost 16.5 million barrels per day of crude and condensate from Saudi Arabia, Iraq, Kuwait, the United Arab Emirates and Iran through the strait in 2024, according to data compiled by Bloomberg. The strait is also crucial for liquefied natural gas, or LNG, with more than one-fifth of the world’s supply — mostly from Qatar — passing through during the same period.

Iran has used harassment of ships in the Gulf for decades to register its dissatisfaction with sanctions against it, or as leverage in disputes.

Not so far. During the 1980-88 war between Iraq and Iran, Iraqi forces attacked an oil export terminal at Kharg Island, northwest of the strait, in part to provoke an Iranian retaliation that would draw the US into the conflict. Afterward, in what was called the Tanker War, the two sides attacked 451 vessels between them. That significantly raised the cost of insuring tankers and helped push up oil prices. When sanctions were imposed on Iran in 2011, it threatened to close the strait, but ultimately backed off.

Oil traders doubt Iran would ever close the strait entirely because that would prevent it from exporting its own petroleum. Moreover, Iran’s navy is no match for the US Fifth Fleet and other forces in the region. Commodore Alireza Tangsiri, head of Iran’s Islamic Revolutionary Guard Corps naval forces, said shortly before the MSC Aries seizure that Iran has the option of disrupting traffic through the Strait of Hormuz, but chooses not to.

During the Tanker War, the US Navy resorted to escorting vessels through the Gulf. In 2019, it dispatched an aircraft carrier and B-52 bombers to the region. The same year, the US started Operation Sentinel in response to Iran’s disruption of shipping. Ten other nations — including the UK, Saudi Arabia, the United Arab Emirates, and Bahrain — later joined the operation, known now as the International Maritime Security Construct. Since late 2023, much of the focus on protecting shipping has switched away from the Strait of Hormuz and onto the southern Red Sea, the region’s other vital waterway, and the Bab el-Mandeb Strait that connects it to the Gulf of Aden and the Indian Ocean. Attacks by Iran-backed Houthi rebels on shipping entering or exiting the Red Sea have become a greater concern than the Strait of Hormuz. A US-led force in the Red Sea is seeking to protect shipping in the area.

Saudi Arabia exports the most oil through the Strait of Hormuz, though it can divert shipments to Europe by using a 746-mile pipeline across the kingdom to a terminal on the Red Sea, allowing it to avoid both the Strait of Hormuz and the southern Red Sea. The UAE can export some of its crude without relying on the strait, by sending 1.5 million barrels a day via a pipeline from its oil fields to the port of Fujairah on the Gulf of Oman to the south of Hormuz.

With its oil pipeline to the Mediterranean closed, all of Iraq’s oil exports are currently shipped by sea from the port of Basra, passing through the strait, making it highly reliant on free passage. Kuwait, Qatar and Bahrain have no option but to ship their oil through the waterway. Most of the oil passing through the Strait of Hormuz heads to Asia.

Iran also depends on transit through the Strait of Hormuz for its oil exports. It has an export terminal at Jask, at the eastern end of the strait, which was officially opened in July 2021. The facility offers Tehran a means to get a little of its oil into the world without using the waterway and its storage tanks were slowly being filled with crude late last year.