Oil Prices Are a Reminder That Foreign Policy Has an Economic Price

Foreign policy is frequently discussed as though it exists in a separate universe from economics.

It does not.

The continuing confrontation between the United States and Iran demonstrates the point. The Strait of Hormuz remains a critical maritime route, while shipping through the strait remains dramatically constrained amid the continuing standoff. Reuters reported that only nine commodity vessels passed through the strait on both Tuesday and Wednesday, despite competing claims from Washington and Tehran about whether the passage is effectively open.

The economic significance is straightforward.

Energy markets do not require a complete interruption of supply to become nervous. The possibility of disruption can be enough to raise risk premiums. Oil is priced globally, which means that a conflict thousands of miles from an American gas station can affect prices paid by American consumers.

This is one reason foreign policy decisions cannot be evaluated solely through military or diplomatic objectives.

A government may determine that confronting another country is strategically necessary. It should nevertheless calculate the economic consequences of doing so.

That calculation includes more than gasoline.

Higher energy prices affect transportation, manufacturing, shipping, agriculture, and household budgets. Businesses facing higher costs may raise prices elsewhere. The result can complicate monetary policy and place additional pressure on consumers already dealing with elevated living costs.

None of this means that economic consequences should determine foreign policy.

It means they should be included in it.

There is also a strategic lesson. Energy security is not simply about producing more oil. It involves diversification of suppliers, resilient infrastructure, strategic reserves, alternative energy sources, and stable international trade routes.

The United States has made substantial progress in some of these areas, but global markets remain interconnected.

The current Iran confrontation is therefore a useful reminder that economic globalization has not made geography irrelevant.

Quite the opposite.

A narrow maritime passage between Iran and Oman can affect consumers on the other side of the world. A missile launch can move markets. A sanction can alter supply chains. A diplomatic failure can become an inflationary event.

Modern foreign policy is economic policy whether governments acknowledge it or not.

The best policymakers understand both sides of that equation.