The Iran war differs from previous conflicts in the Middle East because it has led to the closure of the Strait of Hormuz. Iran has been threatening to close the strait for four decades but refrained from doing so until now. As much as one-fifth of the world's oil passes through the narrow strait, and therefore, the economic and market significance of the conflict will be determined by how long the strait remains closed. The conflict will probably end relatively soon when US President Donald Trump caves into market pressure.
The economic significance of the conflict depends on Hormuz
Due to the war in Iran, the price of oil temporarily rose to over $120 per barrel. European stock markets fell by around 10%, and for the first time in a long time, the dollar has served as a safe haven.
The economic significance of the conflict depends almost exclusively on its impact on the Strait of Hormuz, which is the most important bottleneck in the global economy. Twenty percent of the world's oil passes through the narrow strait.
Iran has threatened to close the Strait of Hormuz in conflict after conflict for more than four decades. Closing the strait has been considered an extreme emergency measure, as Iran is more dependent on oil revenues than any other country. Officially, one-third of Iran's state budget comes from oil, and oil accounts for more than half of the country's export revenues. The closure is also difficult in terms of foreign policy, as Iran's most important ally, China, wants oil to flow freely. Indeed, there have been reports that Iran is still transporting limited amounts of oil to China.
Lessons from the war between Israel and Iran in June 2025
The war between Israel and Iran in June 2025 proved to be a turning point that exposed Iran's strategic mistakes. Iran had chosen a strategy of investing in missiles and drones rather than an air force. The country relied on proxy armies - Hamas and Hezbollah - instead of its own armed forces. In addition, Iran believed it was safe from the Israeli Air Force because Syria, located between the two countries, was an ally and Iran had invested in Russian air defence technology.
In the last two years Israel has succeeded in crippling both Hamas and Hezbollah. With Syria fallen, Iran stood alone against Israel. The June war made it clear that Iran's armed forces were toothless. Iran's missile strikes were unable to cause significant damage to Israel, and its air defence was unable to stop the Israeli Air Force.
However, Iran's ability to close the Strait of Hormuz remained as effective as ever. Iran threatened to close the strait unless Israel stopped its bombing within 24 hours. Israel ignored the threat and continued its bombing campaign. Iran's threat turned out to be a bluff. The United States joined Israel in bombing Iran's nuclear facilities. Despite this, Iran still chose not to close the strait.
It’s not a good idea to show weakness in the Middle East
Israel and the United States probably concluded that Iran was not only militarily weak but also unwilling to close the strait. Iran may also have concluded that it had overestimated its own capabilities and underestimated Israel's air force.
Iran concluded that Israel and the United States would seek to exploit Iran's military weakness and come back for more. Iran would therefore have to radically change its strategy if it were to survive the remainder of Trump’s term.
Iran's strategic problem was its relative weakness compared to its opponents. The solution was to decentralize decision-making as much as possible and close the strait. Iran would initially strike with a larger number of weapons, as they would be destroyed in the initial bombing anyway.
With decentralised decision-making lower-level units would continue to operate autonomously even if the country's leadership were to perish in the strikes. Drone and missile units would carry out strikes on pre-selected targets for as long as possible without the need to consult the chain of command. In a sense, Iran has decentralized itself into a collection of terrorist cells so that it can continue fighting America for as long as possible.
A costly game in the strait
Iran made the right calculation. The country's supreme leader was killed in the initial strikes, as were a significant number of other top leaders. The Israeli and US air forces are hunting for missile and drone caches.
Iran has closed the strait. Insurance companies have raised their premiums and shipping companies have stopped transporting oil. Market pricing still indicates that the economic cost of the conflict will remain low, meaning that the strait will open up in the near future. Trump's statements suggest that he is already nervous about oil movements.
It is very likely that the conflict will be short-lived and will end when market pressure on Trump becomes sufficiently great. He will then announce that America has achieved its objectives, and the bombing will cease. Iran is likely to continue to fight for a while to show that Iran, and not Trump, decided when the war ends. But it is also in Iran's interest that the Strait of Hormuz remains open.
Israel is the only party that would welcome a prolonged conflict. Trump's election as president may not have been what most of the world wanted, but it was mana for Israel’s hardline Prime Minister Benjamin Netanyahu.
Iran does not want war, but the country cannot show weakness again, as it did in the June war. Iran is at its weakest since the Iran-Iraq war of the 1980s. The regime's goal is likely to be survival. The way to show strength and deter future attacks is to keep the strait closed. Keeping the strait closed will deter attacks during the remainder of the Trump term.
One strategy would have been to give in to the US in negotiations and abandon the nuclear weapons program. But Iran’s distrust of the US and Israel is apparently so deep that it conceives ultimate security as necessitating nuclear weapons. At least Iran's former supreme leader, Ayatollah Ali Khamenei, thought so, and paid for this decision with his life.
The United States does not want a long-term conflict, as the main theme of the November midterm elections is the high cost of living. If the strait remains closed, high oil prices will lead to higher prices across the board. In addition, Trump has proven to be allergic to stock market weakness.
The endgame
In the most likely scenario, Trump will announce that he has achieved his goals and conducted one of the most successful military campaigns in history and will thus end the bombing. Iran will continue to fight to prove that the Tehran and not Washington decides when it’s over. But Tehran will also end hostilities and oil supply will resume.
Various risk scenarios are possible. Iran could cause damage to the West through its global networks or through cyberattacks. It may also take much longer for Trump or Tehran to end hostilities, especially if the market remains relatively calm.
