Iran Conflict: A Framework for Understanding the Dynamics

1. Core Themes to Keep in Mind

Geopolitics and markets. Geopolitical shocks are hard to trade in the short run, and most do not leave a lasting mark on financial markets unless they escalate into broader wars.

Crises reshape the real economy. Each major crisis or conflict tends to change how the world economy is organized. Energy access, trade routes, and distribution patterns are likely to shift in some way, even if this particular conflict ended tomorrow.

The power of logistics. Iran's capacity to inflict damage ultimately comes down to geography and logistics. In a multi-polar world, the ability to protect supply lines and trade routes (or charge access fees) is an increasingly critical form of power.

War and inflation. Historically, war is inflationary. Moreover, every major period of higher inflation has been accompanied by higher energy prices.

Multi-polar fragility. In a multi-polar world, ongoing regional conflicts are especially undesirable because they drain resources, attention, and political capital over time.

Second-term US presidents. Second-term US presidents often focus more on foreign affairs, where unilateral action is easier, re-election pressure is lower, and the opportunity to shape a legacy is clearer.

Limits of air power. Air power alone is usually insufficient to degrade the industrial base required to wage war, as seen in conflicts such as the Vietnam War.

Evolution of modern warfare. When a $50,000 drone can force the expenditure of a $1 million interceptor, modern warfare strategy has fundamentally shifted.

 

2. Oil and Energy: How to Think About It

No single "oil price." Commodities do not have one universal price; they trade as specific contracts by grade, delivery point, and time. This shows up in the widening spreads between WTI and Brent, as well as between front-month and longer-dated futures.

Pre-war surplus, post-war disruption. Before the conflict, global oil and gas supply was ample, keeping prices relatively low. Whether prices return to pre-war levels depends on the balance between temporary disruption of supply chains and permanent destruction of productive capacity.

Post-war surplus. Elevated oil prices are a logistics story; supply is not the constraint. Global production capacity is ample, and alternative suppliers and new routes will emerge.

Gasoline and the consumer. In the US, higher gasoline prices are negatively correlated with consumer spending, consumer confidence, and voter sentiment.

Oil and recessions. Apart from the post-Covid outbreak period, every US recession since the 1960s has been associated with higher oil prices, either as a trigger or an amplifier.

US drillers' discipline. US drillers and upstream operators remain focused on capital discipline and efficiency rather than maximizing volume, and there has been no meaningful ramp-up in US rig counts so far.

The Strait of Hormuz. The Strait of Hormuz is a critical chokepoint but has never been shut for a prolonged period; markets tend to price the risk of closure rather than a full, sustained shutdown. Over 20% of world oil, natural gas, helium and nitrogen fertilizer flow through the Strait.

 

3. Understanding Iran's Perspective

3.1 Historic mistrust of the West

Iran's mistrust of the West dates back at least to the 1953 US-UK-backed coup against Prime Minister Mohammad Mossadegh, driven by Cold War and energy-security concerns.

This mistrust was reinforced by Western support for the Shah's authoritarian rule until the 1979 revolution, Western inaction during Iraq's use of chemical weapons in the 1980-88 Iran-Iraq War, and subsequent sanctions and attacks on Iranian soil. These experiences have pushed Iran to look east for strategic partners.

3.2 Internal diversity and regime security

Iran is highly diverse, with several major ethnic groups and many smaller communities spread across a mountainous landscape.

To maintain internal control, the regime has heavily invested in the Islamic Revolutionary Guard Corps (IRGC), which is structured more for regime cohesion and internal security than for conventional power projection.

Instead of equipping a traditional army, Iran projects influence through an "axis of resistance" of proxies, including Hamas, Hezbollah, Syria, and the Houthis. In other words, Iran's defense spending has focused on preserving the regime while projecting power through proxies.

3.3 Asymmetric advantages

Iran is a formidable opponent with asymmetric strengths the US has not faced in decades:

• Scale and terrain. Iran is four times the size of California, with over twice the population nestled among rugged, mountainous geography that complicates any large-scale military campaign.
• Drones versus interceptors. Iran and its partners have developed the capacity to produce large numbers of relatively low-cost Shahed-type drones - variously estimated in the hundreds to around 1,000 units per month - while Western-made interceptors are far more expensive and slower to produce, creating an unfavorable cost-exchange ratio for defenders.
• Strait of Hormuz as leverage. Even in a weakened state, Iran retains the ability to threaten or disrupt traffic through the Strait of Hormuz, a unique chokepoint for global energy flows.
• Battle-hardened society. Iranian leaders and segments of the population have lived with regular conflict for decades, which shapes their risk tolerance and expectations.
• Layered leadership. Power is distributed across the Supreme Leader, IRGC, clerical establishment, and formal political institutions, making decision-making opaque and resilient but difficult to disrupt directly.
• No oppositional leader. Unlike most adversaries, no single oppositional leader or movement exists for the US or Israel to leverage for internal disruption. Moreover, fomenting an opposition is challenging given the size and strength of the inward-focused IRGC.

3.4 Kharg Island as critical node but not easy target

Kharg Island, in the northern Persian Gulf, is Iran's main oil export terminal and handles roughly 90% of its crude exports, with capacity to store tens of millions of barrels.

Because Kharg is central to Iran's oil revenue, some analysts view it as a strategic pressure point: a successful campaign targeting or seizing the island could severely constrain Iran's export capacity, which may explain recent strikes on military targets and speculation about such a strategy.

A ground invasion of Kharg Island would present immense risk. The island is likely to be heavily defended by the IRGC. It is a literal powder keg, with oil pipelines and storage throughout. Moreover a civilian population loyal to the regime of over 8,000 people resides there to support the oil business. Attacking a heavily defended island, full of oil, with civilians in play, in an urban environment is a tactical nightmare.

3.5 Likely Iranian objectives

Current Iranian objectives can be framed along several axes:

1. Weaken Israeli defenses, including by depleting stocks of high-end interceptors.
2. Disrupt US logistics and deployment patterns in the region.
3. Rely on asymmetric warfare to impose costs and allow time and attrition to work in Iran's favor.
4. Reframe the conflict in religious and ideological terms to build broader Islamic solidarity.
5. Consolidate and preserve regime power at home.
6. Demonstrate that Iran must be included in any future regional security architecture.

3.6 Ballistic missiles as a sticking point

Demands from the US to limit ballistic missile capabilities were rejected by Iran as non-negotiable prior to the attack on February 28th:

• The US intended to limit the range of ballistic missiles to protect Israel and US assets in the region.
• Without the ability to project power through a traditional military force, Iran viewed this demand as stripping its sovereignty and right to protect itself.

 

4. Understanding US Perspective

4.1 Nuclear timeline and urgency

Natural uranium ore contains less than 1% of the fissile isotope U-235 needed for a weapon, and enriching it to weapons-grade levels (around 90%) is an energy-intensive and observable process. The amount of resources and inputs needed to begin uranium enrichment has historically enabled the US and Israel to monitor and periodically interrupt the process from afar.

Once enrichment passes roughly 60%, however, timelines shorten and remote monitoring becomes more difficult as the size of operations and energy needs shrink, increasing concern that the ability to monitor and prevent a nuclear weapon from being developed was narrowing. Reports that Iran has approached or exceeded 60% enrichment fed perceptions in Washington that action may be necessary before options narrow.

4.2 Political timing

The upcoming US congressional midterm elections pose a unique risk for Trump. Not only is his agenda at risk if the Democrats flip the House of Representatives (or, less likely, the Senate), but Trump faces the potential threat of impeachment if Democrats win enough seats.

With US congressional midterm elections scheduled for November 2026, domestic political timelines intersect with security assessments. Delays in further negotiations and assessments have raised the risk of military action closer to the midterms, a risk that worried the Trump administration while potentially playing into the hands of Iranian negotiators.

4.3 Stated national security strategy

The US National Security Strategy, released in November 2025, specifically addressed the Middle East and Iran.

• The policy document notes that the Middle East is less strategically important to the US as it is now the largest oil and gas producer in the world. Moreover, Iran is described as weakened after Operation Midnight Hammer in June 2025. The need for focusing on the region should thusly begin to recede.
• The national security strategy also suggests that a coalition of Arab, Israeli, and Turkish support along with that of America could stabilize and lead the region, omitting Persia altogether.
• A National Security Referendum from February 2025 states that nuclear weapons in the hands of Iran represent an existential threat to America.

 

5. Additional Considerations

• According to Pakistani Senator Mushahid Hussain Sayed, an oil tanker from the UAE headed to Pakistan was provided safe passage by Iran because its contents were paid for with Chinese Yuan. China continues to encourage trade in non-USD terms and appears to be leveraging the conflict to its advantage.
• Some tankers have allegedly paid a fee for safe transit through the Strait of Hormuz to Iran. A hardliner member of Iran's parliament, Alaeddin Boroujerdi, has called such fees an extension of Iran's sovereignty.
• In addition to oil, large quantities of fertilizer also ship through the Strait. The reason is that natural gas is a vital feedstock in the Haber process to create nitrogen fertilizer. If the Strait remains closed, rising food prices could be very destabilizing around the world, especially in regions already suffering hardship.
• Qatar is also a leading supplier of helium, an increasingly rare and in-demand element. Helium is required in semiconductor etching and certain medical devices.
• The appointment of Ayatollah Mojtaba Khamenei to succeed his father suggests that hardliners are in charge of Iran.
• From a regional perspective, Europe is in most peril as it will likely face painfully high natural gas prices in the intermediate future at a time when stocks are low.

 

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