Oil Price Whiplash Highlights America’s Enduring Preparedness Gap

Amid the uncertainty caused by the ongoing war with Iran’s clerical regime, the price of oil  jumped to $120 on March 9 before crashing back to $95 in a matter of hours.

The price swings reflect global unease over the war’s potential impact on Gulf energy flows. Traders are struggling to price both near-term disruption risks and the war’s potential outcome — including who will control Iran and what infrastructure will survive the fighting. Politicians and pundits in the United States and abroad are pointing to rising fuel prices as evidence of the war’s cost.

The volatility also exposes a deeper problem. Despite successive wars in and around the Gulf for decades, Washington still has limited tools to calm energy markets when geopolitical shocks ripple through the region.

Washington’s Emergency Tools Are Limited

The administration’s primary economic response has been a tanker insurance backstop through the U.S. International Development Finance Corporation (DFC). But the scale is woefully inadequate. JPMorgan analysts estimate that roughly $352 billion in additional insurance coverage is needed to stabilize maritime energy transport. DFC announced that it will insure losses for maritime insurance companies up to approximately $20 billion.

In normal circumstances, a $20 billion reinsurance loss facility could leverage considerable additional insurance coverage by backstopping private primary insurers. But this is not a normal market. Private capacity has largely exited because underwriters will not cover crews sailing into an active war zone. Without an affordable private layer, DFC cannot leverage a market — it must effectively become one, capped at $20 billion. And that assumes that crews can be convinced to set sail.  

To complement the insurance backstop, the administration has offered naval escorts for tankers. Despite conflicting official statements, as of March 10, no commercial vessels have taken up the offer.

U.S. Never Built Economic War Planning Capability

From the 1973 oil embargo to the Gulf War, Middle East conflicts have repeatedly triggered energy market shocks — and Washington has repeatedly been caught without adequate economic tools to respond. The Pentagon has war-gamed Gulf conflict scenarios for decades, with pre-positioned assets, contingency plans, and doctrine. Yet no economic equivalent — no standing body, no pre-built financial stabilization plans, no budget for economic crisis readiness — presently exists.  

Although U.S. Gulf oil imports have fallen sharply, oil is globally traded. Supply shocks in the Middle East quickly translate into higher gasoline, transportation, and grocery costs for American consumers. The current crisis underscores that economic statecraft must extend beyond sanctions, export controls, and tariffs to include tools that stabilize critical markets during geopolitical shocks.

Washington Must Work With What It Has While Preparing for Future Conflicts

Washington cannot control oil prices, but it can take steps to reduce the most extreme swings.

First, the United States should continue to coordinate with allies on the release of oil reserves. On Wednesday morning, March 11, International Energy Agency member countries announced a historic-sized release to stabilize markets. While only about half full, the U.S. Strategic Petroleum Reserve (SPR) still has over 400 million barrels, or about 20 days of U.S. consumption. Over the long term, Washington should commit to refilling the SPR when oil prices are low so that future administrations have more to work with.

Second, the United States can suspend the federal gasoline tax. This would save Americans roughly 18 cents per gallon, though at a cost to the federal treasury in foregone tax revenue.   

Finally, policymakers should begin building a more robust economic crisis toolkit for future conflicts. Larger and multinational insurance backstops, deeper coordination with private energy traders and shipping firms, and standing plans for financial stabilization of critical commodity markets would leave the United States better prepared for the next geopolitical energy shock.

Dan Swift is a senior research analyst for economics, finance, and trade for the Center on Economic and Financial Power (CEFP) at the Foundation for Defense of Democracies (FDD). Dan is a retired U.S. diplomat who served in Burma from January 2015 to August 2019. Follow FDD on X @FDD. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.