military

Is a US Oil Export Ban Coming?

James Bailey1 Comment

The Iran regime’s military strategy seems to be that by bombing the oil infrastructure of their neighbors and neutral shipping, US gasoline prices will go so high that Americans will demand an end to the war.

How many Americans would be willing to pay $6/gallon gas for months for a ~50% chance of toppling a regime that oppresses 90 million people and destabilizes its region on the other side of the world? Probably only a minority of voters, especially when the President didn’t make the case to the American people or Congress beforehand.

But the US produces more than enough oil for its own needs. Why does the Strait of Hormuz being closed mean higher gas prices here? Only because US oil companies can sell to global markets, and they won’t choose to sell a barrel of oil to a US refiner for $60 when they could sell it to a foreign refiner for $100. If the government took away the foreign option, US oil producers would sell to US refiners at prices consistent with pre-war sub-$3/gallon gasoline.

Naturally there would be costs to an export ban. US oil producers would miss out on windfall profits, while Russian producers would benefit. Foreign customers of US oil, many of them in allied countries, would be angered by the missed shipments and global oil prices would soar further.

But if the US administration wants to avoid a midterm wipeout driven by high gas prices, I see only 3 options:

  1. Get lucky and see the Iranian regime fall quickly
  2. Negotiate an end to the war quickly (which might itself be unpopular if they can’t get a good deal) or just declare victory and go home (but its not clear whether Iran would re-open the strait now just because the US stopped bombing)
  3. Restrict Exports

I say “restrict” not “ban” because I don’t think a complete export ban is necessary to stabilize US prices. You could instead do an export tax (high enough to stop many exports but low enough to allow the buyers with the highest values / fewest alternatives to stay in the market), or you could do a ban but allow a few export waivers for favored buyers or sellers (which seems like Trump’s style), or similarly a quota limiting exports to a certain number (say, limit each company’s monthly exports to 90% of their volume in the same month last year).

This has an obvious precedent: the Biden administration stopped issuing new permits to export liquified natural gas in 2024 to prevent prices spiking here during the Ukraine war (which led to even higher prices for our European allies). But a total ban on oil exports would be a much bigger deal.

Will the Trump administration actually try something like this? It will be an interesting test of US political economy to see what happens when the interests of the military-industrial complex conflict with the interests of oil producers.

Iran on Markets, Markets on Iran

James BaileyLeave a comment

We’re bombing Iran, and Iran is now bombing most of its neighbors. Oil prices are up ~20% since the bombing began last weekend, and stocks are down.

Iranian “Supreme Leader” Khamenei is now dead. Prediction markets sort of saw this coming; I mentioned here a month ago that markets thought it more likely than not that Khamenei would be “out of office” this year.1

Real-money US-regulated exchanges can’t directly cover the war, but others can and do, such as the international Polymarket:

Polymarket’s argument for why they offer these markets

This market shows that regime change is likely, but will take time- a 51% chance by the end of the year, but only a 13% chance by the end of the month.

How would this be achieved? Markets see a 60% chance that there will be US troops in Iran this year, though this market could be triggered by just a few special forces operators, or by troops visiting for humanitarian purposes after domestically-driven regime change. There will likely be a US-Iran ceasefire by the end of May. It’s not clear at all who will be running Iran at the end of the year:

Iran is far from the only country whose future leadership is unclear. Last month I noted that the current leaders of Britain, Hungary, and Cuba would likely be out of office by year end. These are all now looking even more likely than they did a month ago:

So I’ll repeat:

Myself, I find most of these market odds to be high, and I’m tempted to make the “nothing ever happens” trade and bet that everyone stays in office. But even if all these markets are 10pp high, it still implies quite an eventful year ahead. Prepare accordingly.

  1. US-regulated exchanges can’t offer markets on death. Kalshi’s rules stated that if Khamenei died, the market would refund everyone at current prices rather than paying as if he were “out of office”. When he died many people got mad at Kalshi- some who had bet he’d be “out of office” and were mad that they weren’t paid at 100%, others that Kalshi was offering something too close to a death market- “how else would he lose power” (even though Maduro and Assad provide clear recent examples) ↩︎

How to retain your worst employees, US Army edition

mdmakowsky3 Comments

I almost titled this article “The dumbest auction I’ve ever heard of”, but I want to be careful, just in case I fundamentally don’t understand the auction the US army is creating for it’s warrant officers.

Under the new program, called the Warrant Officer Retention Bonus Auction, eligible warrant officers will submit confidential bids for how much money it would take to keep them on active duty for an additional six years, the Army announced last week….Eligible officers can submit a minimum bid of $100 per month, increasing at $100 intervals, the release said, and once the market closes, the Army will use those bids to define a “single, market-clearing bonus rate,” to pay as many officers as the service’s budget allows.

Officers who submit bids at the chosen rate — or lower — will be awarded those bonuses. The catch? Those whose bid above the rate will get no bonus.

Did I just read that right? The they want their officers to 1) estimate their reservation bonus for remaining in the employ of the US Army, and then 2) bid that within a closed bid auction. There is a pool of bonus funds, such that a maximum bid will be established, paying out exclusively to those officers who bid below the maximum. All officers who estimated their reservation bonus (effectively, their reservation wage) above that threshold will receive nothing, almost guaranteeing their exit from the Army.

Are. You. Kidding. Me.

Allow me to rephrase it another way. You want to award retention bonuses to the officers with the weakest outside options and, in turn, have the lowest reservation wages while, at the same time, awarding nothing to your best and brightest officers, those with the greatest outside options? I doubt you could more cleverly design a policy to maximally purge talent from the armed forces. Military bodies have enough problems as is retaining talent, particularly as the promotion pyramid gets narrow in the upper ranks that continue to be filled by older officers uninterested in retiring. We’re going to have to invent entire new swaths of Murphy’s Laws to internalize these leadership shenanigans.

There are, in my outsider estimation, two broad categories of officers with the strongest outside options: 1) young officers with strong technical skills and a demonstrated ability to engage critical thinking skills under pressure, and 2) top tier officers whose personal networks are invaluable to military contractors looking to secure big ticket military contracts. This auction structure will create a mass exodus of the former and an accelerated pathway to the latter. Both are bad, but the loss of young talent could be absolutely devastating as warfare shifts to an ever more technical landscape.

Please tell me I am missing something in the comments and that this isn’t the dumbest labor market policy in the history of moderm US military operations