“I’m in a bit of a panic … even in purely economic terms,” says Paul Krugman.
He isn’t panicking because Donald Trump called him a “lightweight thinker” and a “deranged bum”. In fact, Krugman thinks that it is “evidence that I am doing something right”.
He also isn’t panicking because, despite writing daily criticism of the US president, he does not yet consider himself a serious target for persecution. “Ask me in two-and-a-half years. Let’s not be hysterical yet,” he says soberly. He is, he reasons, “some ways down the list.”
One of the two reasons Krugman is panicking: “Six million barrels a day. That is the rate at which global oil stocks are currently running down.”
The Strait of Hormuz — through which roughly 20 million barrels of oil passed daily before Trump and Israel launched strikes on Iran — has been closed for 83 days. Brent crude is hovering around $106 a barrel. The price reflects jawboning (cough, market manipulation, cough) by the US government, massive injections from global reserves, and hope.
Even if the Strait reopens tomorrow, that hope is ignoring physical reality. Iranian strikes have torn through the Gulf’s energy backbone — oilfields and pipelines in Saudi Arabia, Qatar’s Ras Laffan, the world’s largest LNG complex. Repairs alone will take years.
“We don’t have much further to go before you hit the minimum operational level, which, according to the oil industry people I speak with, could arrive as early as next month. So we are heading for a very serious energy crisis — far more serious than what we’ve seen so far — unless something changes. And I don’t currently see a resolution to the war.”
As we speak, energy exports from the Western Hemisphere are surging at an unsustainable rate, with the US drawing down reserves to prop up global markets.
Chinese oil imports are plummeting — raising speculation about hidden reserves or a severe economic contraction. States are scrambling for supply: East Asia and Europe are outbidding less affluent buyers, leaving markets in Africa and South-East Asia dangerously undersupplied.
In the Philippines, where entire communities live and work on petrol-powered boats, ABN AMRO chief sustainability officer Sandra Phlippen calls it akin to a “pandemic lockdown”.
Krugman was speaking at Erasmus University Rotterdam on the evening of 19 May at a sold-out lecture organised by De Dépendance titled New Economic Order: Global Turbulence and Political Autocracy. He shared the stage with three panellists: Alanna O’Malley, professor of global governance at Erasmus; Aksel Erbahar, an international trade economist at the same institution; and Sandra Phlippen, ABN AMRO’s chief sustainability officer.
Nearly a thousand people had come to hear what one of the world’s most prominent economists made of a world that no longer resembles the one most of them grew up understanding.
A theory descending from a different century
Krugman opened the evening by admitting he was uneasy about giving a lecture titled “new economic order” when, as he put it, “I don’t see much order right now, and I’m not sure we’re going to have any order for quite a while.”
From there he walked the room back through a century of globalisation: its first peak in 1913, the seventy-year collapse that followed, and the explosion of cross-border trade after 1980 that produced the world Tom Friedman famously called flat.
Krugman held up his phone. “Where was this made?” The answer, he said, involves about 15 countries. That is the world we built.
What collapsed it, was not what economists feared. Fifteen years ago he would have warned about a 1930s-style protectionist spiral, or the destabilising rise of China.
Instead, the international economic order is disintegrating because the country that built and enforced it has lost the will to do so. “What we had,” he said, “was one man who wanted to impose tariffs, one man who hated the international economic order. And the US political system, as it has evolved, empowers that one man to do essentially what he wants.”
It is compelling, especially for progressives like me to think this way, but slightly ungenerous. Trump did not create the grievances that elected him: the stagnant wages, the hollowed-out communities, the sense that the globalisation Krugman championed had worked out rather better for some than others. Democrats bear real responsibility for that too. He is more symptom than cause, and the same, I would argue, is true in Europe, though that is a case for another essay.
“The United States, not just the international economic order, but its domestic political order, turns out to be far more fragile than we realised.” That much is undeniable.
His framework for understanding all of this is inherited. Krugman is intellectually descended from Charles Kindleberger, a foundational figure in international political economy, who argued in The World in Depression (1973) that the 1930s catastrophe happened because no single power would provide the public goods an open world economy depends on. Britain could no longer; the US was not yet willing; and the system collapsed for want of a stabiliser. That is the lineage Krugman is working in when he says the Pax Americana is unwinding. It remains a useful frame, but one built for a world of tariffs, gold reserves, and gunboats.
The phone he held up belongs to a different kind of world. Fifteen years ago, the economists watching for systemic risk were watching the wrong things: protectionist spirals, currency runs, the destabilising rise of China. What arrived instead moved through semiconductors, strategic industrial policy, supply chains, dollar clearing systems, and undersea cables. Infrastructure the discipline had spent decades not modelling. Krugman himself admitted as much; he had not seen this coming. The framework was not wrong so much as it was looking at the 20th century while the 21st went past.
This is precisely what political scientists Henry Farrell and Abraham Newman theorised in their concept of weaponised interdependence, the use of privileged positions in global networks for coercion. When I interviewed them in Helsinki last August, Farrell described the EU as “a prehistoric fish with gills in a world that demands lungs.”
Such analysis demands integrating domains that no single discipline yet fully connects, though as a graduate of international relations specialising in global political economy, I would like to think mine comes closest. But then, I would think that, wouldn’t I?
The person in the room who came closest to attempting that integration was not one of the senior economists in the front rows, but a young student who had grown up inside this turbulence rather than during the Great Moderation.
Is US energy-strategy deliberate?
She introduced herself, self-deprecatingly, as “just a student, and not in economics either”, in contrast to the confident assertions that had passed for questions from the men in the room.
Her question was, in my opinion, intuitively the sharpest of the night: had the US deliberately escalated the conflict with Iran, knowing it could lean on Venezuelan oil while Europe and Asia could not?
Krugman was dismissive. Venezuelan production is less than two million barrels a day, the oil has the consistency of “cold peanut butter,” and anyone who thought it could replace the Persian Gulf would be “really, really stupid.” He had served in the Reagan administration, he added. Having seen US government decision-making from the inside, strategy was not what he observed.
Krugman is right about the chemistry. Venezuelan heavy sour can’t replace Gulf grades, and the volumes are trivial. The student’s framing invited that dismissal by naming Venezuela specifically. But the intuition underneath her question is the one worth taking seriously, and it doesn’t depend on Venezuela at all.
Here’s where I disagree with Krugman, and where I think analysts more generally suffer from affective polarization. People tend to dismiss the Trump administration as nutjobs who have no idea what they are doing — and while that might be true for some members, people like Marco Rubio and Scott Bessent pack a serious intellectual punch, no matter if you disagree with the moral framework that occupies their grey matter.
Krugman’s Reagan-era experience may also be the wrong reference point. Had he instead drawn on the Nixon years — on whose cabinet serious and equally ruthless strategists like Kissinger resided — his answer might have looked rather different.
It is not difficult to see similarities between Nixon and Trump. History does indeed repeat itself, first as tragedy, and second as farce.
Both Trump and Nixon were concerned with burgeoning trade imbalances, and sought to reorder the dollar-system to the US’s geopolitical advantage. Nixon’s administration did so by ending the gold standard and encouraging the opening of global capital flows. Trump did so by redollarizing the world through cryptomarkets and stablecoins, something I will be writing a piece on in the future.
And lastly, both gave up on reducing the trade deficit and instead chose to lean into it.
Nixon himself had little patience for economic technicalities. In March 1970, he told his chief of staff he did not want to be bothered with international monetary matters and would not need to see the reports on them in future. Martin Daunton, in his 1,024-page epic history of the global economy from 1933 to 2023, notes that the chairman of his Council of Economic Advisers concluded Nixon “may even have had an almost psychological block about economics,” which he approached much like a reluctant schoolboy doing required lessons.
He delegated to advisers he held in barely concealed contempt, his overriding concern being domestic: protect employment, win over blue-collar workers. When international monetary reform threatened that, his administration retreated into what Charles Coombs — a senior Federal Reserve official at the time — described as “aggrieved acceptance of whatever the future held in store.”
But that presidential indifference coexisted with enormous strategic cunning elsewhere in the administration — and the outcomes, as political economist V.H. Oppenheim would later argue, were anything but accidental.
Writing in Foreign Policy in the winter of 1976-77, Oppenheim made a provocative case: Washington had not merely failed to prevent the 1973 oil shock, but had actively helped bring it about.
When James Akins — the US Ambassador to Saudi Arabia — testified before congress, he claimed that when the Saudis approached the Shah in 1975 to push for lower prices, the Iranians said Kissinger had made clear that Washington “understood Iran’s desire for higher oil prices.”
Akins was removed from his post shortly after, following disputes with Kissinger.
Then, in 2016, Bloomberg obtained a declassified diplomatic cable from the National Archives that filled in another piece of the picture: a secret arrangement, struck in 1974, in which Saudi Arabia agreed to recycle its oil windfall into US Treasuries in exchange for American military aid and equipment.
US policy in the early 1970s tolerated and may even have encouraged higher oil prices. This was a way to kneecap European and Japanese competitors while increasing Washington’s influence with the Arab states, and more broadly, help restructure the global monetary system towards open capital flows.
I have discussed this piece of US geoeconomic statecraft more extensively in this piece:
1973: When the Oil Crisis Became a Weapon
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Grand-strategy or chaos, the result is the same
But whether Krugman’s speculation is correct, or mine is — whether the current crisis is by grand-strategy or chaos (or most likely, a combination of both), the result is the same: the world is splitting into petrostates and electrostates, and decarbonization is gaining geopolitical imperatives.
ABN AMRO’s Sandra Phlippen notes Spain and Italy as exemplary cases. Spain has roughly half Italy’s exposure to gas prices. This is why in her reading Madrid can afford to pick fights with Moscow and Washington in ways that Rome simply cannot.
But she dislikes the word “chaos”. While we focus on acute crises, the real damage, she argues, is always the slow drama you don’t see in the headlines. As with Brexit, where the “cliff-edge collapse in GDP” never came, but the divergence with the European mainland became undeniable over time.
What her risk department at ABN AMRO is watching — she is careful about how much she can say — involves scenarios that are not base cases but are no longer implausible. Real physical shortages arriving before the summer ends, markets beginning to price the bottom of deployable global reserves. “Nobody knows what kind of panic that would trigger,” she says. “And I don’t think we’ve seen anything yet.”
Around 80 percent of the oil transiting Hormuz was destined for Asia. The shortages there are already realities, not hypothetical. In Australia, secondhand EV sales are surging on a weekly basis, a tipping point potentially arriving not by policy but by price. EV, solar and battery costs have fallen up to 99 percent in a decade. There is, she says, a lot still on the table.
Goldman Sachs has warned that Brent will average above $100 a barrel through 2026 if the Strait remains closed for even another month. And even a ceasefire would not reset the clock: infrastructure damage across the Gulf takes years to repair, inventories need replenishing rather than merely stabilising, and markets have absorbed one lesson they will not unlearn. Iran controls the strait.
But oil was not the only thing Krugman was panicking about.
The two-and-a-half year timeline Krugman put out wasn’t a joke: “The chance that the United States will no longer be a functioning democracy five years from now is quite large. Not the most likely scenario, but no longer unthinkable. It is very clear that we are genuinely at risk of losing everything that defines us as a country. That would have been an outlandish thing to say not very long ago. Now it is not.
In a very Kindlebergean fashion, Krugman notes that “we do not have a hegemonic superpower. The United States is no longer powerful enough — or willing enough — to play that role alone,” echoing the words of his late teacher:
“For the world economy to be stabilized, there has to be a stabilizer—one stabilizer. [...] The world economic system was unstable unless some country stabilized it, as Britain had done in the nineteenth century and up to 1913. In 1929, the British couldn’t and the United States wouldn’t.”
— Charles P. Kindleberger (1973), The World in Depression, 1929-1939
Krugman understandably wants to end on an optimistic beat, noting that there are not one but three economic superpowers in the world: “the United States, China — which is looking stronger by the day, given what’s happening — and the European Union, which is basically their equal.”
“The EU, in terms of economic size, political stability, and institutional capacity, is a match for either the United States or China. And if we ask who will ultimately keep global commerce safe in the years ahead — once we get past the current crisis in the Persian Gulf — well, the United States, I’m not sure. But does the EU have the capacity? Actually, yeah. So in a strange way, the future of the world economic order — whether there is any kind of order at all — depends a great deal on what happens in Europe. Will Europe rise to that challenge? I have no idea. But I am hopeful.”
Krugman is right that Europe is probably the last real chance to reinvigorate something resembling a liberal world order. But where Krugman is hopeful, I would borrow Gramsci instead: pessimism of the intellect, optimism of the will. Europe does not rise to the challenge merely by completing the single market, issuing eurobonds, and unblocking the Common Foreign and Security Policy. The task is more herculean than that. It requires a transformation that is harder to legislate than any of those reforms: a continent that has spent eighty years outsourcing its security, its strategic thinking, and much of its sense of historical agency learning to reclaim those instincts. And it requires something deeper still: a new social contract, a civilisation worth defending, in which European citizens feel ownership over the order being built rather than merely receiving its bill in the form of austerity.
That is precisely why it matters that the call is coming from someone like Krugman. A Nobel laureate, an American, an architect of the order now unraveling, standing in Rotterdam to tell Europeans that they are not bystanders. That they are, in fact, an equal of the United States and China, and that the world may need them to behave like it. Europeans are unaccustomed to hearing this and tend to discount it when they do.
Speaking for myself, and I suspect for many other Europeans in that room: it is something we are genuinely grateful for. Mr. Krugman, if you are reading this, thank you. We need more outsiders, and more insiders, willing to tell us to get our shit together.
More on what that actually requires — and why I think the real fight for Europe is happening inside our own heads rather than in Brussels or on the battlefield — in my next piece.
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Edit: I wanted to make clear I added a brief argument about the fact that Krugman is right about the chemical compostion of Venezuelan oil.
The EU possesses a currency that neither the USA nor China has: trust.
Trust in predictability, adherence to laws and treaties, the capacity for compromise, institutional stability, and transparency—and the value of this currency rises day by day.
Rubio and Bessent are morons, no intellectual ounch. Seriously.