In October 2023, the geopolitical landscape shifted dramatically when Hamas, one of Iran’s military proxies, launched a shocking raid into Israel. The ensuing conflict has escalated beyond most analysts’ expectations, with Israel resolutely committing to dismantling Hamas’s grip on Gaza. Notably, Israel’s recent surgical strike that eliminated the Hamas leader—while he was comfortably ensconced in Iran—underscored the Shakespearian twist of fate in this conflict.
Initially, the turmoil in the Middle East sent oil prices surging as traders reacted to the burgeoning nightmare of an uncontained war with Iran’s affiliates. Yet, despite a backdrop of sustained global energy supply — undeterred by the ongoing War in Ukraine, sanctions on Russia, or the disruption of energy shipments through the Red Sea — market sentiment appears to be stabilizing. The potential for at least one more sharp decline in oil prices looms, as commercial hedgers find themselves near overextended levels in net short positions. However, this market has exhibited a troubling absence of a clear trend since the onset of the Ukraine War in 2022 and only exogenous events like a widescale war are likely to light a fire.
The central question, as we navigate these treacherous waters, is how Iran will respond to Israel’s recent actions. One might be tempted to indulge in hyperbole, yet it is accurate to assert that Israel now has Iran over a barrel. Should Iran retaliate with severe assaults launched from its own soil that inflict significant pain on Israel, the stage will be set for a comprehensive Israeli counteroffensive, supported by the United States, aimed squarely at Iran’s nuclear installations and oil infrastructure. This would not merely be a tactical military response; it would deal a potentially fatal blow to a nation whose very economy relies on energy exports and an increasingly robust arms trade with Russia.
Historically, Iran has adeptly navigated the crowded minefield of international sanctions. During the Obama administration with the removal of sanctions, Iran’s oil output surged by 40%, keeping its clandestine nuclear ambitions alive and bolstering its capacity to equip proxy forces across the region. The arrival of President Trump heralded a paradigm shift, marking the initiation of the most stringent sanctions Iran had ever faced, which crippled both its economy and proxy warfare capabilities. However, with President Biden’s return to power came a rapid and misguided elimination of those sanctions, predicated on the naive belief that Iran would eschew its nuclear aspirations.
A mere month ago, Secretary of State Antony Blinken conceded that Tehran had routinely flouted its commitments to curtail nuclear development, now capable of fashioning a bomb in mere weeks, as opposed to the year or two previously estimated. This troubling acknowledgment coincides with disturbing intelligence reports regarding Iran’s covert plots, including at least one intended assassination of former President Trump, likely in anticipation of the stringent sanctions he would reinstate.
While sanctions can indeed inflict grave harm on Iran and its proxy entities, a well-coordinated military response from the U.S. and Israel could dismantle Iran’s energy production, eliminate its capacity to arm adversaries, and neutralize its nuclear aspirations. That said, the Iranian leadership is likely motivated to avoid an outright war with the West. Assuming that the ruling clergy possess a modicum of rationality, we should not expect a major Iranian direct offensive. Instead, the onus may shift to proxies such as the Houthis and Hezbollah to act on Iran’s behalf, potentially executing their ambitions amidst plausible deniability.
Indeed, recall that in April, Iran retaliated with a drone and missile assault following Israeli strikes near its embassy in Syria. That retaliatory strike, however, was mitigated by a forewarning to Israeli intelligence, demonstrating a degree of restraint that could well define future engagements. With Israel now striking Iranian territory, retaliation could feasibly intensify, and while the desire for retribution may swell, it is unlikely to manifest as a full-scale invasion.
As the specter of a regional conflagration looms—one which would certainly galvanize hawkish rhetoric from Trump, eager to outdo his prior sanctions while bestowing Kamala Harris the opportunity to showcase her own toughness in the political arena—one must remain skeptical about the scale of overt Iranian hostilities. An escalation might indeed spike oil prices temporarily into the stratosphere, but prevailing wisdom suggests that ultimately, as conflict subsides, we could witness a reversion to lower prices as the dust settles globally.
