33 Kilometres of Nash Equilibrium

The Strait of Hormuz as a payoff matrix

Do you know what matters most? What matters most is that approximately 21 million barrels of crude oil and petroleum products pass through the Strait of Hormuz every single day — roughly 21% of global petroleum liquids consumption — moving through a waterway that is, at its narrowest navigable point, about 33 kilometres wide. The world has been running a structurally naked short on physical supply security, and the person who holds the delivery option is currently shooting at tankers.

What the financial press consistently fails to articulate is that the interaction between Washington, Tehran, Riyadh, and Moscow — and the tanker operators navigating between all of them is a game, in the precise technical sense developed by von Neumann and Nash and subsequently interrogated with admirable rigour by Hargreaves Heap and Varoufakis in their Game Theory: A Critical Introduction. Understanding the payoff structure does not guarantee you will predict the outcome. But it is considerably better than reading Reuters headlines and updating your Brent flat price view based on vibes.

There is also a second game running in parallel, which the Western commodity press covers even less competently: the quiet, structural repositioning of Russia’s hydrocarbon supply policy from volume maximisation toward price maximisation — with geopolitical force majeure as the instrument of transition. The two games interact. Understanding how is the point of this article.

The Prisoner’s Dilemma

The foundational architecture of the Hormuz situation is the Prisoner’s Dilemma, and it maps with uncomfortable precision onto the US-Iran dynamic. Hargreaves Heap and Varoufakis lay out the classic formulation: two players each choose between cooperation (C) and defection (D), with payoffs that make mutual defection the individually rational but collectively catastrophic outcome.

Translated into the current situation:

                      Iran: Keep Strait Open (C)    Iran: Close Strait (D)
  USA: Negotiate (C)          (3, 3)                       (0, 5)
  USA: Escalate  (D)          (5, 0)                       (1, 1)