Posted on by Colin Twiggs

Iran: What Comes Next?

Key Points

  • Combined air strikes on Iran by the US and Israel make good media coverage but are unlikely to lead to regime change.
  • An Iranian strategy that prolongs the conflict while increasing the cost to the US and its allies has the potential to frustrate US ambitions.
  • Rising crude oil prices and increased US deficits will likely fuel a sharp increase in inflation.

President Trump succeeded in diverting media attention from his troubles at home, with attention-grabbing headlines about Operation “Epic Fury” in Iran. But does he have a clear end goal? He claims the Iranians have requested talks, but they deny it. So what happens if the Iranians are unwilling to give Trump his media victory?

Predictions of a “short war” typically underestimate the opponent and the unpredictability of war.

Many things in war are unpredictable, but some are self-evident:

  • Israel does not have the manpower to wage a full-scale war against Iran.
  • The US public does not have the stomach for a large war, and US leaders want to avoid putting “boots on the ground” at all costs.
  • US allies in the Middle East are equipped with modern air defense systems that can protect them from most missile and drone attacks, but they don’t have the stockpiles of weapons to endure a sustained barrage over several months.
  • Oil tankers carry 21 million barrels of crude oil through the Strait of Hormuz every day. Four ships have already been damaged. Closing the Straits would halt the flow of 20% of global oil production, causing a massive supply shortage and spike in oil prices.

Crude Oil Flows Through the Strait of Hormuz

Brent crude prices shot to above $80 per barrel on Monday.

Brent Crude

Robin Brooks compares the current price rise to Russia’s invasion of Ukraine in 2022:

Today’s post …. benchmarks the current shock versus Russia’s invasion of Ukraine four years ago. Russia is a massive oil producer and – at the time – markets worried it would get shut out of the global economy. Yesterday’s spike in oil prices was more than three times as big as the rise on Feb. 24, 2022, the day Russia invaded Ukraine. That’s a big shock no matter how you cut it.

Iranian officials say they have closed the Strait of Hormuz. US Central Command says that is not the case. But tanker rates and insurance costs have skyrocketed.

Lloyds List highlights the steep rise in very large crude carrier (VLCC) rates:

BALTIC Exchange indexes for very large crude carriers loading in the Middle East Gulf reached record highs on Monday. Iranian attacks on tankers and insurers’ withdrawal of war risk cover have effectively closed the Strait of Hormuz.

Spot rate strength in the MEG has cascaded through global freight prices, leading to a surge in rates for VLCCs and other tanker segments worldwide.

The Baltic Exchange’s MEG-China TD3C index went parabolic after the outbreak of war, coming in at a record $423,736 per day on Monday, up 94% from Friday.

Crude Oil Tanker Rates

Global Impact

China gets about 45% of its crude oil needs from the Middle East, with 11% from Iran.

Global Oil Trade

  • Russia, as a large oil exporter, would benefit from a spike in crude oil prices. So would Canada and African exporters like Angola.
  • Large oil importers — China, India, Japan, the rest of the Asia-Pacific region, and Europe — would all suffer from a steep rise in crude oil prices.
  • The US is a net oil importer. While less affected than other major importers, the US has experienced steep rises in inflation during past spikes in crude oil prices.

The 1973 Yom Kippur War and the Arab oil embargo caused a massive jump in crude oil prices, with CPI reaching 12.0% (red- RHS). The Iran-Iraq war in 1980 caused an even steeper spike in inflation, with CPI at nearly 15%.

WTI Crude & CPI

During the 1990 Gulf War, CPI rose above 6.0%. However, during the 2003 Iraq War, deflationary forces— from the collapse of the Dotcom bubble and China’s entry into the WTO — helped offset inflationary pressures from higher crude oil prices.

WTI Crude & CPI

Crude oil prices had already spiked in 2021, but Russia’s full-scale invasion of Ukraine in February 2022 lifted annual CPI to 9.0%.

WTI Crude & CPI

US Deficits

The US federal debt is at a precarious 122% of GDP, and budget deficits remain stubbornly high. The US does not have much spare capacity to wage an extensive or protracted war without generating high inflation.

Federal Debt to Nominal GDP (%)

Conclusion

China’s dependence on crude oil imports is its Achilles heel. The country imports 11 million barrels of crude oil per day, and much of that flows through the Strait of Hormuz.

Chinese leaders will be watching the US-Iran conflict with alarm. US control of the Strait of Hormuz would have China at its mercy. China’s blue-water navy is decades away from being able to challenge US naval supremacy in the Indian Ocean. The only effective way for them to intervene in the current conflict would be to supply Iran with advanced weapons that can challenge US naval dominance.

The Iranians have been battered by air strikes before. They know that a full-scale US invasion is unlikely, and that nothing short of that will likely remove them from power. Their best strategy is patience. They can afford to wait the Americans out. Increase the cost of the war and frustrate US efforts to achieve a decisive outcome. Another protracted conflict in the Middle East, with sky-high oil prices causing a steep rise in inflation, will soon sour US public opinion and lead to yet another retreat.

A protracted conflict in the Middle East would also increase US fiscal deficits. Inflation will likely rise, fueled by increased government spending and rising crude oil prices. Higher inflation and further increases in government debt would increase term premia on long-dated Treasuries. High long-term interest rates would raise the cost of servicing government debt and further increase the deficit.

Attempts by the Fed to suppress long-term interest rates, through QE or other means, would further fuel inflation.

Our strategy is to remain heavily overweight in gold and defensive stocks with stable income streams, and underweight long-term financial assets and high-multiple growth stocks.

Acknowledgments

6 Replies to “Iran: What Comes Next?”

  1. Neither media coverage nor regime change are goals of US/Israel action here, although the latter would certainly be a welcome side effect.
    Iran was rapidly increasing its arsenal of ballistic missiles, at the rate of 100 per month, with the intention of providing cover for a renewed nuclear weapons program by overwhelming the missile defence systems of us “infidels”….
    The cost of acting now, while the regime is weaker, is MUCH MUCH less than the cost of waiting.

    1. Hi Steve,
      I see regime change as the only valid objective. Repeatedly bombing Iran without toppling the IRGC leadership will increase their determination to acquire WMD.
      There are no easy options.

      1. Sure, regime change to one which is peaceful and responsible would be the best, but the minimal aims of the military campaign are to destroy the Islamic Regime’s military capabilities. That will most certainly be achieved. If the Regime still survives, it will no doubt try to rebuild a we may have to repeat it all again several years later.
        However it’s crystal clear that failing to act now would have been globally disastrous: a mad regime with many tens of thousands of ballistic missiles – enough to overwhelm defences – providing cover for the regime to arm those missiles with nuclear warheads…

      2. In an interview with Hillel Newman, Israel’s new ambassador to Australia, published in the Sydney Morning Herald on March 6, 2026 (article titled “Israeli ambassador says it’s ‘mind-boggling’ to question legal basis for war on Iran”), the Ambassador explained that the primary objectives are to eliminate Iran’s ability to produce nuclear weapons and fire ballistic missiles — once achieved, “from our point of view it’s over.”
        He confirmed that regime change in Iran would be welcomed but is not a central war aim; the focus is on removing existential threats.

      3. Hi Steve,

        It doesn’t add up.
        Less than 9 months after an attack that was supposed to have neutralized Iran, Israel is forced to launch a second attack because of an imminent, existential threat.
        Are we supposed to believe that Nethanyahu would be satisfied with knocking out a few missiles, and a few Iranian leaders, then declaring “mission accomplished?”
        Each time Israel is likely to absorb more punishment as the Iranians adapt their weapons and tactics.
        Stopping short of regime change would be complete lunacy.

        There are two possible scenarios:

        1. Iran surrenders after a few weeks of aerial bombardment, appoints a moderate as leader, and agrees to disarmament with regular inspections.
        2. Iran does not surrender, and the war continues until the US launches a full-scale invasion or it withdraws from the conflict, leaving the current regime in power.

        Americans love their high-tech weapons, but they don’t want their sons to die in the Middle East. So where does that leave Israel in the second scenario?

  2. Its a significant gamble and low probability positive outcome for Trump’s administration given the pending midterms.

    Whilst toppling IRGC leadership is a worthwhile objective of itself, the probability of doing so within the context of Trump being a No War President (which has material currency with his base), is unlikely to happen given (i) the IRGC has had decades to game out this outcome and has built an arsenal and proxy/guerilla apparatus to support those objectives (ii) to achieve that aim requires USA boots on the ground which is an acute contradiction to one of his supporting campaign policies, (iii) there is very little buy in and support from ‘allies’ this time around, (iv) reliance on China manuf. to supply key military components.

    The above only compounds the Epstein crisis and significant failure to deliver on another key campaign promise and I suspect despite the virtue of the spruiked objective, an underlying objective for the ‘virtuous’ war is more closely linked to this crisis.

    And then there is a potential inflation and the cost of goods spike, which will compound another broken promise.

    All of the above doesn’t differentiate him from the ‘others’, it evaporates the self serving mythology he’s created. The Dem’s are already flipping safe seats.

    That said, AI diffusion at corporate level will be good for profits in the short / med term but likely exposed to the long violent history of the US playing out (again) as the collaboration of Trumps and Project 2025’s agenda collides with the reality of the constitutional establishment.

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