The United States and Israel began a military campaign four weeks ago that they believed would be won quickly. The United States and Israel have destroyed the majority of Iran’s army, killed its supreme commander and attacked its nuclear facilities.
Four weeks later, however, what they described as a military conflict has become a worldwide economic crisis. Energy prices and inflation predictions are being revised in real-time.
They are farther away from ending this conflict today than when Trump’s Hormuz 48-hour deadline passed four days earlier.
Iran rejected Washington’s peace offer, set its own five conditions that are almost guaranteed to be refused by the US, and has threatened to increase the stranglehold on energy markets around the globe.
Brent crude is now around 108 dollars per barrel. This represents a nearly 48 percent increase over a single month and almost 47 percent above the levels of a year ago.
Oil prices, currency fluctuations and trade disruptions are now fighting the war which began in battle. Here’s the current situation.
Four Weeks of War
The US and Israel began Operation Epic Fury on February 28. They eliminated the Supreme Leader Ali Khamenei from day one, and dismantled Iran’s conventional army.
US CENTCOM Chief Admiral Brad Cooper stated this week that US forces have now hit over 10,000 targets in Iran. They also destroyed 92% the largest Iranian naval vessels and reduced Iran’s rates of drone and missile launches by 90%.
It is an impressive military campaign on paper.
The US Air Force cannot neutralize the weapon that Iran has found.
The closing of the Strait of Hormuz, the small chokepoint where a fifth of world oil and gas flows normally, has turned an Iranian military defeat into global supply shock. This has sent benchmark oil prices into the three-digit range and shook investors around the globe.
Since then, the energy markets are in turmoil.
Brent crude is trading at 108 dollars. One-month gains have reached 50%, as traders are pricing in an extended disruption.
Companies and governments scramble to control the consequences of fuel shortages. The World Food Programme predicts that up to tens millions will be left with acute hunger, if the conflict continues until June.
A cascade of failures in the supply chain is reshaping inflation predictions globally, raising recession risks for Europe and Asia and shattering decades of international energy cooperation.
The G20’s inflation target is 2%, but economists say that rising oil prices may add up to more than a percentage point. In fact, the headline rate in developed economies will likely drift back toward 3% instead of achieving 2%.
This war is now a global conflict. Israel fights Hezbollah on the Lebanon border. Iranian missiles hit Gulf States, such as the UAE, Kuwait and Bahrain. US bases in the area have been attacked.
This week, the UN Secretary General warned that “the world faces a larger war”. The markets have reacted accordingly. Major US indexes fell more than 1.5% during a recent session after Iran announced it would effectively close the Hormuz Strait.
Iran rejects the 15-point Iran proposal
Intermediaries have been the conduits for a diplomatic path that lies behind the violence. Pakistan, Egypt and Qatar are the intermediaries between Washington DC and Tehran.
The US sent a 15-point formal peace proposal through Pakistan to Iran last week.
The report calls for the reopening of the Strait of Hormuz and the removal of Iran’s highly-enriched uranium stocks, the curbing of its ballistic missile program, as well as the cutting of funding to regional proxy groups, such Hezbollah and the Houthis.
Washington was focused on a geopolitical objective, but its economic goals were more important. Washington wanted to ensure that energy supplies are restored before global supply systems collapse and inflation increases for consumers who already face higher costs of living.
Trump stated publicly in this past week that Iranian officials “want to do a deal” so bad, but they are scared to admit it. Steve Witkoff, Jared Kushner and Secretary of State Marco Rubio are the US special envoys leading negotiations.
Iran’s response was an outright rejection.
Tehran has set five requirements that have to be met for any negotiation to begin. These include an end to US-Israeli attacks immediately, concrete guarantees of future aggression against Iran, the payment of war reparations and international recognition of Iran’s authority in relation to the Strait of Hormuz.
Iran has also stated that it won’t enter into talks until all of these conditions are met, and will conclude this war when it chooses. This stance keeps energy traders constantly on alert. It is also what has prompted G7 countries to release emergency stocks in an effort to calm price spikes and provide protection for consumers.
White House warned that Trump would hit Iran harder if it refused to acknowledge that the country had been defeated. This statement sent a shockwave through fragile markets and caused further declines in Asian stocks, causing safe-haven flow into dollars.
Diplomatic failures are a result of a lack of trust
Before Iran rejected the US offer, a more serious problem was already sabotaging any chance of an agreement. Iranian officials told mediators that Trump had tricked them twice.
Tehran claims that in both rounds of previous nuclear talks this year, Trump approved surprise military attacks while simultaneously portraying himself as an willing negotiator. Iran is telling intermediaries that it doesn’t wish to be duped again.
The speaker of Iran’s parliament, Mohammad-Bagher Ghalibaf has warned Washington against testing their resolve.
Ghalibaf is described by analysts at the International Crisis Group as an ardent ally of Iran’s islamist system who will not make major concessions in Washington.
He has a record that suggests he is not interested in appeasing Western Investors or in returning oil exports to US Terms. Markets are pricing in an extended supply shortage rather than a rapid normalisation.
A leadership vacuum is another factor that makes everything more difficult.
Since his appointment, Iran’s Mojtaba Khmenei is not seen publicly. US officials claim he’s injured.
Israel was targeting Araghchi as well as Ghalibaf before Pakistan intervened. Pakistan warned Washington that, if these men were killed, then there would be no one left to negotiate. This risk now comes with not only a diplomatic price, but also the possibility of a deeper economic disaster if all talks fail and oil prices remain structurally high into next year.
Iran now threatens a second chokepoint
What Iran has said about global shipping is more alarming than the US rejection.
Tehran publicly declared that the Strait of Hormuz would not be the same as it was prior to the War, it had rewritten maritime rules and the sole authority for granting transit permits now lies with Iran. This is a claim of perpetual sovereign control of an international waterway that’s used by everyone.
Iran also threatens to shut down the Bab el-Mandeb Strait – the narrow passage that connects the Red Sea with the Gulf of Aden – if the attacks against Iranian territory continues.
Bab el-Mande is the destination for approximately 12% of all oil transported by sea.
Analysts estimate that if both Straits were effectively closed simultaneously, the supply disruption would be around 25 million barrels a day — or about 25% of the oil used in the world.
The scenario is unprecedented in modern times, with major economies now planning for oil to be priced at $150-200 per barrel, along with lower growth predictions and increased pressure on central bankers to defer interest rate reductions.
Iran told intermediaries to include Lebanon in any ceasefire final agreement, adding further complexity.
Tehran believes that any deal which does not solve the Israel-Hezbollah dispute is no deal.
This gives Israel an effect veto, as it has a number of demands, including a deep-seated skepticism about any concessions made by the US to Iran. It also keeps markets in limbo between the two options, with Asian stock indexes suffering massive selloffs, investors bracing for escalating regional conflict.
What is the current situation?
US military victory is almost complete, but the US loses the larger contest that it was meant to solve: economic competition.
The majority of Americans are against the strike on Iran. Oil prices continue to rise, expectations of inflation have risen again and the Pentagon has deployed thousands more airborne troops so that Trump can launch a ground attack. A Marine unit is expected to arrive in the Gulf at the end of this month.
Iran rejected the peace plan and claimed permanent control over the most important shipping route in the world. It also threatened to launch a second war and warned every middleman and intermediary within the region that it would end the conflict on its terms.
It is not only measured in distance diplomatically, but also in oil prices, currency strength, and global consumption.
The longer this continues, the greater the cost to world economies, including higher fuel prices, slower growth, and the delayed return of the low inflation era that policymakers believed they restored.
Is this post another energy chokepoint? Oil and inflation worries may rise as the Iran-US conflict drags on.
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