The whole world expects President Trump to end the Iran war any day now. Trump keeps insisting that he’s in no rush to do so. Through it all, the oil markets remain surprisingly calm. These facts are all related.

When the war broke out, experts warned that if the Strait of Hormuz remained closed for more than a few weeks, oil prices would spike to $150 or $200 a barrel. The strait has now been closed for three months. Yet the price for a barrel of the most heavily traded type of crude oil sits at about $94, not so far from where it was in early March, shortly after the war broke out. Even after Trump’s latest declaration, in yesterday’s Cabinet meeting, that he felt no pressure to reach a peace deal (“I don’t care about the midterms,” he said), crude prices jumped by only 2 percent. “The math just doesn’t add up,” Rory Johnston, an oil-markets analyst who writes the widely cited Commodity Context newsletter, told me. “For people like myself who spend all day analyzing this stuff, we’re looking at prices wondering: Am I going insane? What is happening?”

Part of the answer is that the United States and other countries have dipped into their oil reserves to make up for some of the lost supply. But that can’t fully explain why oil prices have remained as low as they are. The more important reason has to do with investor psychology. The price of a barrel of oil reflects not just physical realities today, but expectations about what the market will look like in the near future. For the past three months, the global oil market seems to have been operating under the assumption that, before too long, the Strait of Hormuz will reopen and oil will start flowing again.

That assumption is rooted in a deeper underlying belief: that Trump will inevitably back down once the economic pain gets high enough. This is the so-called TACO theory of Trump’s decision making, as in “Trump Always Chickens Out.” “The market has correctly realized there’s an audience of one who will determine the outcome of this, and that’s Trump,” Arnab Datta, a managing director at the think tank Employ America who specializes in energy markets, told me. “Among traders, the assumption is that the pain can only get so high before Trump retreats.”

David A. Graham: The TACO presidency

That logic turns out to be dangerously circular. Prices are low because investors expect Trump to end the war before prices get too high; but because prices are low, Trump faces less pressure to end the war. In fact, the president seems to have figured out that he can calm the oil markets simply by gesturing at the prospect of a peace deal every so often. Of course, a peace deal or a new cease-fire could still be announced at any moment. But the dynamic between Trump and the markets—call it the TACO equilibrium—is what has kept the war going longer than almost anyone expected.

As a general matter, the belief that Trump will back down in the face of economic disaster isn’t unfounded. After Trump announced his “Liberation Day” tariffs in April 2025, the stock market lost trillions of dollars in value in a few days. Then, as the tariffs went into effect, bond investors began selling off U.S. Treasuries, sending interest rates soaring. A mere 13 hours into his new trade policy, Trump backed off and announced a 90-day pause on the tariffs, citing the fact that the markets had gotten “yippy.” Interest rates fell and the stock market experienced its largest one-day rally of the year. Investors who had bet that Trump would blink made a lot of money.

In the following months, a version of this dynamic would play out again and again. A new consensus view emerged on Wall Street that investors should respond to Trump’s threats not by selling, but by “buying the dip” and profiting when he inevitably backed down. This tactic became known as the “TACO trade.”

Then, on February 28, the U.S. and Israel struck Iran. The price of a barrel of Brent crude, generally considered the global benchmark for oil, spiked from about $70 to almost $120 in a little more than a week. But then, on March 9, Trump announced that the conflict was “very complete” and that the strait had been reopened. (It had not.) Oil prices fell below $90 a barrel. The TACO theory appeared to have been vindicated once again.

Except Trump didn’t actually follow through this time. The war dragged on. Oil prices began creeping up again, eventually topping $110. On cue, Trump announced that his administration had had “very good and productive conversations” with Iran toward ending the war. And once again, the price of oil dropped, this time down to about $95 a barrel. This pattern has played out repeatedly: rising oil prices, followed by an announcement of an imminent peace deal, followed by falling oil prices, followed by the war not ending.

Read: No way to make a deal

The TACO theory turned out to have two core limitations. First, it can become self-negating. Oil traders assume that higher oil prices will force Trump to end the war. But that assumption is what keeps the price of oil lower than it otherwise would be. Second, the theory can be easily gamed. Trump probably understands that the markets expect him to chicken out. So as soon as prices start rising, he can act like he’s about to yield, and everything will cool down. When prices fall, the traders who bet against TACO will lose big. They’ll think twice about making the same bet again next time. “So we end up in this endless merry-go-round,” Johnston told me. “Prices rise, Trump talks about a deal, prices fall, and then Trump suddenly feels like he doesn’t actually need to make the deal.”

This strategy, analysts assured me, can’t last forever. Markets are starting to catch on. Johnston pointed out that the impact of Trump’s peace announcements on oil prices has been diminishing over time, as traders begin to recognize the pattern. Even more important, the law of supply and demand will eventually become unavoidable: Countries are running through their stockpiled oil reserves quickly and could begin to exhaust them over the next month. At that point, there won’t be enough barrels to go around, and buyers will start bidding up the price of the remaining ones. “It’s a ticking clock,” Gregory Brew, the Eurasia Group’s senior analyst for Iran and energy, told me. “We’re losing 13 million barrels of oil every single day. Eventually that reality is going to set in. And when it does, prices are going to rise very very fast.”

Trump could also start feeling other forms of economic pressure. The April U.S. inflation report showed that prices were rising at their fastest pace since mid-2023, thanks largely to the fallout of the Iran war. This made bond investors nervous. Higher inflation is extremely risky for the holders of government bonds because it creates the risk that any debt paid back in the future will be worth much less than it is today. Many bondholders therefore responded to the report by selling their U.S. Treasuries. This in turn caused the interest rate on government bonds to rise to their highest levels in nearly 20 years. (A bond sell-off lowers the price of bonds, which mathematically causes their “yield”—the interest rate they pay out—to increase.)

“Equity investors have been ingesting large amounts of hopium that any day now Trump will come to his senses and call the war off,” Jared Bernstein, the former chair of Joe Biden’s Council of Economic Advisers, told me. “But bond traders generally don’t have patience for hopium. They are much more likely to respond to what’s actually happening right now in the economy.”

Even chaos in the bond market, however, doesn’t seem to be affecting Trump as much this time around. The same week that Treasuries hit a record high, Trump declared that he had ordered his staff “not to rush” to reach a settlement with Iran. For now, the TACO equilibrium continues to hold.