For six months, the war with Iran was disruptive but manageable. The Strait of Hormuz was largely closed to maritime traffic, blocking a transit route for roughly 20 percent of the world’s liquefied natural gas trade and an even higher proportion of the oil trade. Prices ticked upward and many parts of the world struggled with oil and gas shortages, but countries found ways to help stabilize the global energy market. The United States and Iran both refrained from overly destructive attacks on the Gulf region’s vital energy infrastructure. It seemed that Washington and Tehran could extend their current stalemate, occasionally trading airstrikes and attacks on individual tankers and energy facilities, without leading the world into economic calamity.

That is no longer the case. The war has now expanded to critical parts of the region’s energy infrastructure, including the very routes that had been making it possible to offset the asphyxiation of the Strait of Hormuz. As of mid-September, the Bab el Mandeb Strait—a maritime chokepoint along the Red Sea route that is the main alternative to shipping oil and gas through the Strait of Hormuz—is under the control of the Houthis, a Yemeni-based group aligned with Iran. And a drone launched by an Iranian-affiliated militia operating out of Iraq struck the East–West pipeline in Saudi Arabia, through which the kingdom had diverted a large portion of its oil exports. The attack temporarily disabled the pipeline.

As a result, the price of oil jumped from the mid $70s in August to $110 per barrel in September. And if the rest of the region’s energy infrastructure is no longer off limits to military attack, further supply interruptions could easily push oil prices to $150 or even $200 a barrel. An escalation of fighting between Saudi Arabia and the Houthis, which has become a very real risk since the Houthis launched attacks on the Saudi cities of Riyadh and Yanbu last week, would add to the upward pressure on prices. If that happens, an energy crisis that plunges the world into recession is not far off.

Washington must now find a way out of this untenable situation. Half a year of alternating military attacks and economic coercion has not forced Tehran and its partners to make concessions, and there is no reason to expect that those strategies—much less threatening to “annihilate” Iran, as U.S. President Donald Trump did in his UN speech on Tuesday—would compel them to change their behavior today. Nor would it be possible for the United States and its allies to protect energy infrastructure and shipments indefinitely under threat of attack by Iran and other hostile actors.

The least bad option is a return to diplomacy. The United States needs to try to reach an agreement with Iran to end the war, one that includes not just a cease-fire but also a plan for keeping vital waterways open and measures that induce Tehran to comply with its terms. Washington must also encourage Saudi Arabia to pursue a similar settlement with the Houthis. Brokering these truces will require painful concessions from both Washington and Riyadh. But continuing to fight this war would court economic disaster, and that would be far more painful.

At the start of the war, many economists and analysts feared that the effective closure of the Strait of Hormuz would provoke an acute energy crisis and economic downturn, or worse. Their concerns were reasonable. Before the conflict began, nearly 20 million barrels of crude oil and refined products passed through the strait each day, along with close to one-fifth of globally traded liquefied natural gas. By August, energy exports were running at roughly half their prewar level. Some days, fewer than ten ships traversed the strait—far fewer than in peacetime, when between 130 and 150 commercial vessels would make the passage each day.

Yet the global energy system proved remarkably capable of adjusting to what the International Energy Agency (IEA) called the “most severe oil supply shock in history.” Oil prices rose from just over $70 a barrel before the war to more than $125 in April but then fell back down to the $80s and $90s, where they remained until this month.

Part of what kept prices relatively stable was additional oil production outside the Gulf. The United States, Argentina, Brazil, Canada, and Guyana together added an estimated 1.4 million barrels a day. That replaced only a fraction of the missing Gulf supply, but every barrel mattered in a tightening market.

Tapping inventories helped as well. In March, the IEA’s 32 member countries authorized the release of 400 million barrels from emergency reserves, the largest coordinated drawdown in the agency’s history, and more than double the previous record of nearly 183 million barrels released in 2022 amid the war in Ukraine. Traders and refiners also drew on commercial inventories to replace some of the missing Gulf oil and allow refiners to maintain fuel production.

Further supply interruptions could push oil prices to $150 or even $200 a barrel.

Demand also fell, especially in Asia. Part of the decline was the result of a consumer response to high prices. China, the world’s largest crude importer, also made a large, orchestrated adjustment that resulted in its seaborne imports’ dropping from over 11 million barrels a day before........

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