That the war in Iran qualifies as a major combat operation rather than a limited one is already clear. In the campaign’s first week, the U.S. and Israeli militaries have attacked some 2,000 targets in Iran. The Iranian military has retaliated by firing of hundreds of missiles and drones against neighboring countries and Israel. The fallout from the war has already extended across the entire Middle East region, if not the rest of the world. But the Trump administration’s precise goals for the war remain ambiguous.

Why are analysts already talking possible munition shortages faced by the United States and its allies? Who are the winners, and losers, from the increase in fossil fuel prices? And what are the broader economic effects of war in the Persian Gulf region?

Those are just a few of the questions that came up in my recent conversation with FP economics columnist Adam Tooze on the podcast we co-host, Ones and Tooze. What follows is an excerpt, edited for length and clarity. For the full conversation, look for Ones and Tooze wherever you get your podcasts. And check out Adam’s Substack newsletter.

Cameron Abadi: There’s already talk that the U.S. military and its allies are experiencing a scarcity of munitions, specifically the interceptors that can shoot down the sorts of missiles that Iran is firing. Despite the demand for these interceptors, producers seem to have trouble ramping up. Is there a mismanagement of the relevant supply chains? Or is this problem endemic to modern warfare?

Adam Tooze: Israel and Iran are waging war, by my estimation, at the longest distance two countries have ever fought with no land engagement. So then the crucial rate-limiting factor is the ammunition. And one particular type of ammunition that you need here are drones, and those are relatively cheap. It’s the missiles and the interceptors that are really the rate-limiting variable. And there is a kind of historic constant here in modern warfare. I think the first time a shell crisis really intrudes into the narrative of modern history is in the late summer and early autumn of 1914, when the Europeans deadlocked on the Western Front and started running up these large ammunition tallies for bombardment and counter-bombardment and ran out of shells. And it had an impact on the conduct of the war in 1914.

And it exposes a kind of inherent and perverse logic in military production. On the one hand, the rational thing to do is, before you start a war, to have all of the ammunition you need for the war. So you pile it all up. But on the other hand, if you think about that, it’s a grotesquely inefficient use of resource to pile up ammunition unless you know specifically what you’re going to use it for. And furthermore, it’s subject to obsolescence. If you buy a bunch of shells from 20 or 30 years ago, they’re not going to be of the newest type. And we’ve seen in Ukraine what was required to refurbish them. So it’s also reasonable not to buy more ammunition than you need. And if you go down that route, which of course is the money-saving route, then your supply chain for actually producing the stuff you need when it gets real is very, very tight. So then when you do ramp up to war production, you can’t easily get there. One thing that you talk about is having shadow factories, which are unused capacity ready for the war case, but that’s hugely expensive. Who in their right mind would do that?

So I think you’re right to suggest that modern war has this problem of being voraciously hungry for ammunition and chronically unable to actually satisfy that demand. And it’s only when you get into a truly appalling conflict of massive ammunition use over the very long term that you can stabilize the inputs and outputs, but no one in their right mind would ever want to be in such a conflict. So it’s inherently problematic. In this particular case, the interesting thing is that, so far at least, the focus has been not on offensive weaponry but on defensive weaponry. So it’s all about the interceptors. They matter much more not to the United States, which despite all the crazy expostulations is, of course, at absolutely no imminent risk from any Iranian direct attack by conventional means, right? Terrorism, perhaps, but not by rockets. But it’s all of America’s allies, which really are. So the Gulf states, Israel itself, and Ukraine are all desperately dependent on one of these tight supply chains for interceptors.

And the thing about interceptors is that they’re like rockets times two, or to the power of two, right? Because it’s not just that you’re firing a rocket at a target—that’s V-2, Wernher von Braun, World War II—but this is famously trying to hit a bullet with a bullet. So you have to devise a rocket smart and fast enough and quick-reacting enough to actually hit the other person’s rocket. And there’s layers of these. And the thing about them is they’re fiendishly expensive. So millions and millions of dollars per shot. And you need the batteries, say, for Patriots—it was a mind-blowing number, a single Patriot battery with its radar and electronic control, a billion and a half dollars for just one piece of firing kit, right? Then the rockets themselves are millions, and the THAAD rockets, the ones that go out to 150 kilometers [93 miles] high up on the arc of the ballistic missile, like $15 million per shot. And it’s estimated you need three to really take care of a ballistic missile. So the Iranians fire 500, you need 1,500, and Lockheed’s total annual supply capacity is 600. That’s years into the Ukraine war.

And so there’s your problem. And even incredibly rich Gulf states and Israel, which is constantly in a state of conflict, don’t have stocks of interceptors large enough to actually counter a long-range bombardment. So there really is an issue, and the issue is not so much whether America can keep on delivering hellfire to Iran. The question really is, can it keep its coalition together if the Gulf states can’t protect themselves? And what is the cost that will be paid in Ukraine, where they’re facing a similar ballistic missile barrage from the Russians, who now can produce, we think, between 80 and 100 ballistic missiles a month? So do the math again. You might need, if they went all in, hundreds of interceptors for the Patriot batteries in Ukraine. And you can see how this just doesn’t work as a calculus.

CA: Fossil fuel prices are up since the start of the war. What exactly is the cause—is that specifically because of Iran’s closing of the Strait of Hormuz? And who are the big losers from these price increases so far?

AT: I mean, this is the nightmare. This is the Armageddon scenario. Closing the Strait of Hormuz is the tail-risk horror scenario for global energy markets.

There are two different dimensions. For oil, the central thing is that if you block export from these giant oil fields, the problem is, what do you do with the oil? Because an oil field, you can’t turn the thing on and off easily. If you do, you risk real damage to the oil field because they’re these pressure cookers of natural pressure geologically. And once you open them up, you have a very, very tightly designed, scientifically determined process for emptying them efficiently. It’s like trying to cook pasta and turning it off halfway through. It’ll be appalling.

So the nightmare scenario is that if the strait remains closed for many weeks, the storage capacity of the really big producers in the Gulf, which are Saudi Arabia and Iraq—Iraq being the most vulnerable probably—will overfill. It’s unclear whether they actually can be filled to capacity because no one’s ever tried to do it. Normally, they stop at 80 percent—they would have to go over. Then they would try to put things in tanker fleets and try to keep them there. But then if you really run out of storage capacity, you actually have to lock in the reserves. And that’s a disaster potentially also for long-run productivity from those fields.

The other variable is gas. The strategic significance of the region is that Qatar is the largest single supplier. There’s one LNG [liquefied natural gas] facility in Qatar, which accounts for 20 percent of global LNG shipments. And that has been shut down. They’ve declared force majeure. They voided their contracts. And so that market is already in spasm. Now, both of these are really stories about Asia. Eighty-five percent of the oil that goes through the Strait of Hormuz goes to Asian markets. A third goes to China; then it’s Japan, South Korea, India, and then poorer Asian societies, which are really most at risk.

Europe’s gas supply doesn’t come directly from the Gulf. The LNG ships out from the Gulf in the direction of Asia. But closing the Gulf shocks the whole market. And since Russia’s invasion of Ukraine, Europe has become more dependent on LNG. And so those shipments, because they’re fungible, are priced at a global price. And as the global price goes up, because Qatar’s out of the picture, the Europeans start paying more. And European gas stocks are again at a historic low point at this time of year. It’s unbelievable when you see the numbers. They rebuilt them in the first years of Ukraine. And then apparently they’ve gotten complacent again, and they’re rock bottom. So there’s even some sort of crazy scenario in which Europe could potentially find itself in real supply difficulty.

The answer, of course, is always just to ramp up the price. You just pay more. You wave the German wallet, you’ll get an LNG supply. The problem is then people lower down the food chain, and we’re really talking about Pakistan, Bangladesh—populous, really large Asian societies—don’t have the same purchasing power as rich countries.

CA: Are there winners from this increase in fossil fuel prices? Russia comes to mind as a major oil producer—but so does the United States.

AT: Yeah, I think, in the immediate term, that’s exactly who you’d expect. It’s a replay, on a much smaller scale so far, of the 2022 shock, where we saw absolutely gigantic, historic profits being earned by Western oil companies. And if you look at Exxon’s share price over the last six months, you see the pop in early December, when people started getting serious about this buildup. They’re clearly a beneficiary. You’re absolutely right.

In retrospect, it’s clear, you know, that the Russians could pay for their war against Ukraine through the energy price effects of the uncertainty they created by means of the war. And in fact, the West, Europe notably, paid for quite a lot of that.

One would hope further down the line, you know, fingers crossed, there is some reason in the world that renewables become winners from this. Because how many more times do we need to learn the lesson that depending on imported fossil fuel energy from geopolitically unstable regions subject to America’s erratic politics and strategy is a bad idea? We are at a historic moment now where you can buy very cheap substitutes for gas in particular and increasingly long range for the EV [electric vehicle]. The shipments of solar panels from China, in terms of their generating power of electricity, compare with the electricity that you could generate by burning all of the gas normally shipped through the Strait of Hormuz.

Of course, it’s not quite the same, and everyone will say it’s better to run your generator off gas. And sure, it’s not total parity, but we’re in the same ballpark now, where if you want to make the investment and shift, renewables are now far more attractive even than they were in 2022 because of what’s happened in China since then. So they ought to be winners, too, if there’s any reason to the world.

CA: Where does China stand in this war? Are there opportunities for China in the basic sense of the United States now being distracted from East Asia? But also negative effects in terms of its access to discounted Iranian oil—and also the exposure that China’s military technology, which Iran had acquired, can’t keep up in warfare with the United States?

AT: There are people who say this war in Iran is a humiliation for China. I don’t get it. I honestly don’t. Yes, the technology might not be up to dealing with American and Israeli technology. Surprise, surprise. Though I think that the jury’s out on that. It’d be surprising if that were definitive. And then the second point is that this was supposed to be China’s axis, right? Venezuela and Iran were supposed to be part of some sort of axis that China was constructing.

I think that just completely misses the geopolitics of this. China is the dominant emergent economy of the 21st century. It is immensely rich. It has huge financial resources. It deals with top-tier partners, and that isn’t Iran and Venezuela. Those are the Gulf states, Saudi Arabia, and the Emiratis. And those are the people you do business with if you’re China. You don’t need Iran and its cheap oil and discounts. China has a $1 trillion-plus trade surplus and trillions of dollars in foreign assets. It’s not haggling for cheap oil. It’ll take cheap oil because its people are canny, but anyone who thinks that that’s the main line of Chinese policy is truly barking up the wrong tree.

The Chinese will presumably just be playing it cool. They’ve said what needs to be said, which is that this is an illegal and outrageous action from which they absolutely distance themselves. And then they’re just going to wait, I imagine, until the dust settles and the true players in the Gulf realize where the stability, where the source of market demand, where the source of relevant technology is going to be. And it’ll be China, not the United States. It just feels as if this is the moment for the Chinese simply to wait for the game to come their way.

They will not relish this. They want stability. But I mean, in terms of oil price, they have maybe as many as 2 billion barrels stored away. And why? Because slightly more than 20 years ago, in the early 2000s, when they started to worry about geopolitical competition and oil in particular and realized how dependent they were and oil demand in China was surging, there was a huge strategic debate in Beijing about whether or not to have an oil reserve. And the more national security hawkish people won. And then 2003 happened, and everyone was like, OK, that makes sense. And they’ve systematically built that to the point now where they can feed the largest productive apparatus in the world for about five or six months if they absolutely have to.

But if Chinese commodity buyers move their tiniest little finger or somebody even thinks they’re going to move their tiniest little finger, everyone in the global commodity markets moves to China’s tune. Because they’re the big buyer and they have the money. And one thing they’re not short of is dollars. They have too many—they need to spend some. If they could somehow remediate their giant surplus, they’d probably welcome the opportunity to.