Hours before the Fed’s first rate hike since 2023, Iran’s parliament speaker posted a Taylor rule with two new terms: the Strait of Hormuz and Bab el-Mandeb. It read as a joke. It was a claim about who sets the price of American money.
UKOilWatch · 5 October 2026 · OilWatch Network Analysis
On September 16, the day the Federal Reserve raised interest rates for the first time since 2023, the speaker of Iran’s parliament posted a math equation. Mohammad Bagher Ghalibaf kept the formula American central bankers have used for three decades as a yardstick, then bolted two new terms onto it. Both were named after waterways Iran and its allies can close.
It read as a joke. It was also a claim about who sets the price of money in America: the rate that reaches a mortgage, a car loan, and the credit line of every trucker hauling groceries. A week later, U.S. diesel was at a record, above $6.50 a gallon.
Ghalibaf’s post, published on X about three hours before the decision, was headed “Straits Taylor Rule”:
i = r* + π* + 1.5(π − π*) + 0.5(y − y*) + α(SOH − SOH*) + β(BEM − BEM*), α, β > 0
Under it he wrote: “Let’s see if a hike could open SOH or produce a single barrel :) You can’t 25bp a chokepoint and r* isn’t neutral. It’s SOH risk premium, and We set it. Stay unanchored !”
SOH is the Strait of Hormuz. BEM is Bab el-Mandeb, the narrow strait at the southern end of the Red Sea. In his version, the more those two waterways are disrupted, the higher American interest rates have to go.
The formula he was mocking
In 1993, Stanford economist John Taylor wrote down a simple rule for central banks. It has been a benchmark ever since, not a formula the Fed follows mechanically.
The rule asks two questions. Are prices rising faster than the central bank wants? Is the economy running hotter than normal? The further prices and output run above target, the higher rates should be; the further below, the lower. Higher rates make borrowing more expensive. People and companies borrow less, spend less, and prices cool.
Ghalibaf kept that structure and added the two straits. A quarter-point hike is 25 basis points. His point was that a rate decision in Washington cannot reopen a strait or pump an extra barrel. His claim went further than the oil price. The “neutral” rate the Fed treats as a fixed anchor, he wrote, isn’t neutral at all: it is the Hormuz risk premium, “and We set it.” Part of that premium is fear: buyers pay extra because they do not know whether Hormuz will be open tomorrow.
The link to the Fed is the trap he was pointing at. If the central bank raises rates whenever an oil shock pushes prices up for long enough, then whoever can keep the oil price high has a hand on American rates. The cheapest way to do that is to make oil harder to ship.
In the days before September 16, that pressure was already in the market. Tankers had been hit in and around Hormuz. A Saudi refinery at Jizan was struck on September 7 and 8. Iran-backed Houthi forces were active along Bab el-Mandeb. On September 10, drones launched from Iraq hit Saudi Arabia’s East-West pipeline, the main overland route around Hormuz. The next day Riyadh shut it as a precaution. Brent had settled back above $100 a barrel on September 9, and on September 11 it spiked to about $110. A similar pattern had preceded the Fed’s July meeting, when Houthi forces said they had struck two Saudi tankers and Brent touched $100 on July 23. That time the Fed held.
The Fed’s next decision is October 28.
Oil becomes diesel
Iran sits on the north shore of the Persian Gulf. The sea route out is Hormuz. The United States and Israel struck Iran on February 28, and within days Iran treated the strait as closed. In March, Brent crude jumped more than 60 percent, the biggest monthly gain in records going back to 1988. Shipping through the Gulf’s main export artery, normally about 20 million barrels a day of crude, condensates, and products, effectively stopped.
In September, Houthi forces seized ground along Bab el-Mandeb. Those are the two waterways in Ghalibaf’s formula. Hormuz is the front door. The main detour is a Saudi pipeline across the desert to the Red Sea. Tankers taking that oil to Asia still have to pass Bab el-Mandeb. Control of both straits is control of the front door and the back door.
That crude is refined into diesel, and diesel moves the American economy. Trucks running on it carry nearly three-quarters of U.S. freight by weight. Before the war, diesel cost about $3.76 a gallon, according to AAA. By the week of September 21 it was at a record: $6.53 on the Energy Information Administration’s weekly survey, and above $6.51 on AAA’s national average. EIA’s survey had already cleared $6.28 on September 14, up about 68 percent from a year earlier. Farmers feel it first. Tractors and combines run on diesel, and the fall harvest is their busiest season. One Missouri farmer told the Associated Press he was paying twice as much for diesel this year.
The Gulf also makes a large share of the world’s fertilizer. Exports through Hormuz account for nearly a quarter of global urea exports, the most common nitrogen fertilizer, itself a product of the same hydrocarbon system. Between February and April, urea prices jumped about 80 percent, according to the World Bank. Jet fuel, from the same barrel, roughly doubled in price after the war began. By August, U.S. airfares were about 23 percent higher than a year earlier.
Add it up and you get the August inflation report. Prices across the economy were 3.4 percent higher than a year earlier. Energy prices were about 16 percent higher. Core inflation, stripped of food and energy, was 2.4 percent. The shock started in the energy line.
Diesel becomes a rate hike
On September 16 the Fed moved the way the Taylor rule, read on headline prices, points. Prices were rising faster than it wants. It raised the benchmark a quarter point, to a 3.75–4 percent target range, the first increase since 2023. The vote was unanimous. Sixteen of the 18 participants who submitted projections penciled in at least one more hike this year. Chair Kevin Warsh said the central bank had removed “a dose of accommodation,” and that “inflation is too high and has been for too long.” The median projection does not show inflation back at 2 percent until 2029.
A reporter put Ghalibaf’s premise to him directly: “a ¼ point rate hike does not reopen the Strait of Hormuz.” Warsh did not argue. “We cannot affect any individual price, whether it be oil prices, whether it be foodstuffs at the grocery store. But what we can do, and will do, is ensure that any change in relative prices don’t broaden out.” The Fed’s argument is that it isn’t trying to reopen the strait. It is trying to stop an oil shock from becoming everything else’s price. It had held through the March spike and again in July, when oil touched $100. It moved in September, after six months of it.
That is the mismatch Ghalibaf was mocking. A rate hike works by making people borrow and spend less. Americans are not paying more for diesel because credit is too cheap. They are paying more because oil cannot reliably leave the Persian Gulf, and because refining capacity and Russian diesel exports have also been knocked down. The Fed is using a tool built for too much borrowing against a problem caused by too little oil getting to market.
The hike lands on families, then on the government
A rate hike does not fix the shortage. But the inflation, and the rate path it forces, reaches every borrower.
On February 26, two days before the war began, the average 30-year mortgage rate was 5.98 percent, the first time in three and a half years it had dipped under 6 percent. By September 24 it was back at 7.03 percent. On a $400,000 loan, the monthly payment at 5.98 percent is about $2,393. At 7.03 percent it is about $2,669. That is an extra $276 a month in principal and interest, more than $3,300 a year, for the same house. The same arithmetic hits car loans, business loans, and credit cards. The household already paying more for diesel, groceries, and flights is now paying more to borrow.
The biggest borrower is the government. When it spends more than it collects, it sells Treasuries: a promise to repay later, with interest. On September 24, total public debt outstanding was about $40.1 trillion. Every year a slice of that debt comes due and has to be rolled at whatever yield lenders demand that day. Higher rates make every roll more expensive, starting with the short-term bills that come due every few weeks.
The bill is already the second-largest line in the budget after Social Security. In the first 11 months of fiscal 2026, through August 31, the government spent about $1.05 trillion in net interest. On the Congressional Budget Office’s measure, that is roughly 12 percent more than the same period a year earlier, and more than it spent on the military. America now spends more to pay its lenders than to defend itself.
Historian Niall Ferguson has a name for that line. Ferguson’s Law: a great power that spends more on debt service than on defense risks ceasing to be one. He points to cases from Habsburg Spain and ancien-régime France to the Ottoman Empire, most of which crossed the line and lost great-power standing not long after. Not all of them did: his own paper counts interwar Britain as a power that crossed it and remained a great power. On Congressional Budget Office figures he cites, the United States crossed it in 2024. The 2026 numbers have widened the gap.
The spiral
Follow the steps in a circle. Iran makes oil harder to ship. Oil becomes diesel. Diesel becomes inflation. Inflation pushes the Fed to raise rates. Higher rates make the debt more expensive, so the government borrows more. Nervous lenders demand still higher rates to keep buying the paper.
If the shock lasts, the Fed eventually has to choose how the spiral ends. It can keep raising rates until something breaks: housing, stocks, or the bond market itself. Or it can stop hiking while prices keep climbing, and, in the worst case, end up creating money to buy the bonds nobody else wants. That path protects the bond market and cheapens the dollar, which makes prices climb faster. That is Iran’s bet.
America’s answer
Washington’s counter is not a better monetary formula. It is energy.
In February 2025, President Trump created a National Energy Dominance Council, chaired by the interior secretary with the energy secretary as vice-chair, to drive U.S. oil, gas, and power production and exports as high as they will go. Its founding order speaks of “wielding our commercial and diplomatic levers to end wars.” The public line is abundance. The strategic reading is blunter: America does not want to be one supplier among many. It wants to be the supplier the world cannot do without. In December 2024, before taking office, President-elect Trump told the European Union to close its trade gap with large-scale purchases of American oil and gas, or face tariffs.
In 2025 the United States produced a record 13.6 million barrels of crude a day, about 40 percent more than either Russia or Saudi Arabia, and it was already the world’s largest exporter of liquefied natural gas. In 2026, other people’s supply came off the market.
On March 18, Israel struck Iran’s South Pars gas field. Iran answered by firing missiles at Ras Laffan in Qatar, one of the largest gas-export sites on earth. The strikes knocked out about 17 percent of Qatar’s LNG export capacity, with repairs expected to take three to five years. Trump said the United States “knew nothing about this particular attack.” Israeli and U.S. officials told Axios the strike was coordinated with and approved by the White House. In September, drones from Iraq hit Saudi Arabia’s East-West pipeline, and Riyadh shut it. In Russia, Ukrainian drones hit a refinery about once every three days in the first eight months of 2026, according to the International Energy Agency. By June, Russian refinery throughput was about 30 percent below a year earlier. U.S. intelligence has helped Ukraine plan energy strikes since 2025, according to the Financial Times. And on September 6, Energy Secretary Chris Wright said the biggest role of the U.S. military in the region was to stop the export of Iranian crude.
Most of those shots were not America’s. Iran hit Qatar. Iraqi militias hit Saudi Arabia. Ukraine hit Russia. America and Israel started the war on February 28. In March, American forces bombed military targets on Kharg Island, where up to 90 percent of Iran’s oil exports are loaded, and left the oil terminal standing, “for reasons of decency,” Trump said, while warning he would reconsider if Iran interfered with shipping. Whoever fired, the result ran one way: each time someone else’s infrastructure went down, American energy became more valuable.
The gap has been filled from the Gulf of Mexico, not the Persian Gulf. In April 2026, U.S. crude exports hit a record 5.6 million barrels a day, 21 percent above the old record. In the first half of the year, American LNG exports rose 23 percent, and exports to Asia more than doubled. Europe is expected to take about two-thirds of its imported LNG from the United States this year, according to the Institute for Energy Economics and Financial Analysis. Qatar, one of the great gas sellers, has been buying American cargoes to keep customers supplied while capacity at Ras Laffan is out. By the end of July, QatarEnergy had bought 33 U.S. shiploads this year for customers in South Korea, Taiwan, Japan, India, and Bangladesh. The European Union has said it intends to buy $750 billion of American energy by 2028.
Then Venezuela. On January 3, U.S. special forces captured President Nicolás Maduro in Caracas and flew him to New York on narco-terrorism and drug-trafficking charges. Venezuela holds the largest proved reserves on earth, roughly 300 billion barrels by OPEC’s count. At the end of August, the White House said the interim government had granted a U.S.-backed company, whose parent is part-owned by the Pentagon, 100-year rights to 17 fields, with Washington entitled to buy a fifth of the output at cost; Caracas has described a 25-year arrangement. Those are barrels that will take years and tens of billions to bring to market. Wright put the mission plainly: “add supply in Alaska, in the Gulf, in Venezuela, everywhere we can,” and keep Middle East exports growing too, just not through a strait Iran can close.
No official puts the strategy in these words, and the administration’s stated goal is cheaper oil, not dearer. This is a reading of where the actions point, not a plan anyone has published: America does not need to win a bond war if it can make the world need what America sells.
Where the two wars collide
Iran’s attacks make oil expensive. Expensive oil pushes customers out of the Gulf and toward American supply. Every tanker Iran threatens helps the energy-dominance case. At the same time, every barrel taken offline keeps prices high, high prices keep inflation high, and high inflation tells the Fed to raise rates. Higher rates make the debt more expensive to carry. America earns more on every barrel it exports, but its drivers and farmers pay the same price as everyone else.
Washington will not say it wants expensive oil. Expensive oil is what happens when rival suppliers are offline. Iran needs the price to stay high for as long as possible, because every month of expensive oil is another month of expensive interest on $40 trillion. America needs expensive oil only for a while: long enough for customers to start signing long-term contracts with Texas, Alaska, and American-operated Venezuelan fields. Once those buyers are locked in, cheaper oil becomes the American interest, as long as it does not fall far enough to stall the shale wells the strategy depends on. It would pull inflation down, let the Fed cut, and shrink the interest bill.
Treasury Secretary Scott Bessent described the other half of the answer on September 1: “In two years, the Strait of Hormuz will be like a worthless piece of water. Oil will be going on pipelines across the land.” Between American supply and Gulf bypass, if most of the world’s energy moves around the strait instead of through it, the fear priced into every barrel disappears, and Iran loses the premium it claims to set.
Two clocks
This is a race between two clocks. America’s is measured in energy contracts and pipelines: how fast it can lock in the customers knocked loose by the war, and how fast the Gulf can route its oil around Hormuz. Iran’s is measured in Fed meetings. In the first 11 months of the fiscal year, the interest bill grew about 12 percent. Either clock can be stopped from outside: a ceasefire ends Iran’s; a recession does the Fed’s work for it.
Ghalibaf’s two new terms only matter as long as the world’s oil has to pass those straits. The American plan is to make the straits worthless. The Fed votes again on October 28. If a tanker is hit or a pipeline goes quiet and oil is climbing as officials sit down, the formula he posted is still in the price. The open question is whether Washington can erase those two terms before they break the bond market.