Sam Levan

What the Iran War Means for the Economy and Global Security

AI-assisted

On February 28, the US and Israel launched a joint military operation against Iran 1,2,3. Unlike the June 2025 war, where Israel started alone and the US joined 10 days later with a single strike on nuclear sites, this time they attacked together from day one with regime change as the explicit goal 1. The military build-up was the largest since Iraq 2003: two carrier groups, 200+ warplanes 1. Nuclear talks had ended just two days earlier 1.

Khamenei is dead. The strikes killed Ayatollah Ali Khamenei, Iran’s Supreme Leader since 1989, along with 5-10 top leaders and at least 40 commanders 2,5,6. Targets included his headquarters, parliament, IRGC HQ, the judiciary, and the atomic energy agency 1,4. Iran has formed a temporary leadership council, but there is no obvious successor 7,8.

Iran hit back fast, but with restraint. The IRGC launched missiles at Israel (8 killed in Beit Shemesh, 1 in Tel Aviv 5,10), struck at 27 US bases in the region 3, and hit airports/ports in Dubai, Bahrain, Kuwait, and Qatar 5,9. But the Economist notes a key signal: Iran’s initial barrages were much smaller than June 2025, when they launched 100+ missiles per salvo. This suggests Iran is calibrating its response, possibly keeping the door open for diplomacy 1. The alternative: since regime change has been declared, they fire everything in every direction 1.

Proxies are signaling, not yet fighting. Hezbollah has “limited options” after the 2024 Lebanon war 11. Houthis have promised to intervene 13. Iraqi militias say they’re ready 12. None have fully activated yet.

Where the World Stands 17,18,21,22

The conflict is forcing a diplomatic split. The poles are obvious; the interesting story is who’s being pulled in both directions.

← Supporting strikes Opposing strikes →

US + Israel

Launched the strikes

Anglosphere

Supporting but not fighting

EU

US alliance ←→ Energy/economic exposure

Gulf states

Anti-Iran ←→ Physically in the crossfire

China

37% of crude through Hormuz ←→ Supporting Iran

Russia

"Unprovoked act of armed aggression"

UN Security Council paralyzed.

What Happens Next

Scenarios

The conflict could go four ways. What matters is the gap between the best case and the most likely one.

Declared Victory Likelihood30%

Quick off-ramp. Both sides claim a win.

Trump declares mission accomplished within days/weeks. Iran's calibrated response signals willingness to negotiate. A ceasefire emerges, hardliners weakened but not removed. US/Israel can only maintain full-tempo operations for "a few weeks before munition stockpiles falter" 1, and Trump has promised not to repeat Iraq. Both sides may want an off-ramp.

Regime Collapse Likelihood15%

Leadership fractures, popular uprising succeeds.

Strikes + Khamenei's death + domestic protests cause the regime to fracture. Popular uprising succeeds, aided by defecting military factions. As the Economist notes, "When bombs are falling, people don't take to the streets" 1, and the regime has backup leadership. But December protests showed genuine popular anger, and the decapitation of leadership creates openings.

Prolonged Air CampaignMost likely Likelihood40%

Weeks of strikes, no resolution, Hormuz disrupted.

Strikes continue for weeks. Iran retaliates against Gulf energy infrastructure and disrupts Hormuz with mines, jamming, and harassment. No regime change, but severe degradation. A messy conflict with no clear endgame. Regime change by air power alone has never worked 1. Iran has prepared bunkers and succession plans. IRGC factions jockey for power, making unified surrender impossible. But Iran can't win a conventional war either, so it drags out.

Full Regional War Likelihood15%

All proxies activate, multiple fronts, global disruption.

Iran activates all proxies: Hezbollah opens a northern front, Houthis intensify Red Sea attacks, Iraqi militias target US bases, Iran strikes Gulf oilfields directly. Iran's initial response was calibrated, not maximalist 1, and China would pressure Iran not to destroy Hormuz 15. But cornered regimes do desperate things.

What Does This Mean for the US Economy?

The Strait of Hormuz is the variable that matters most. It carries 15m barrels/day, one-third of global seaborne oil 15. Iran has already broadcast that shipping is “no longer permitted,” and the disruption is real: insurers are cancelling policies, at least 5 giant tankers made U-turns on Feb 28, and a tanker was hit by a rocket off Oman on March 1 15.

Declared Victory
Hormuz disruptedIran blocks the strait. 15m barrels/day, one-third of global seaborne oil, stops flowing.→Oil spikesSupply shock hits immediately. Oil was already $72, $10 above fundamentals.→Gas + shipping up→Broad inflation→Fed stuck→Recession risk

Oil to $80-85, +25-30¢/gal at the pump, lasting weeks. Comes back quickly.

Regime Collapse
Hormuz disruptedIran blocks the strait. 15m barrels/day, one-third of global seaborne oil, stops flowing.→Oil spikesSupply shock hits immediately. Oil was already $72, $10 above fundamentals.→Gas + shipping up→Broad inflation→Fed stuck→Recession risk

Short-term oil spike, then collapse to ~$55 as uncertainty clears. Weeks of pain, then relief.

Prolonged CampaignMost likely
Hormuz disruptedIran blocks the strait. 15m barrels/day, one-third of global seaborne oil, stops flowing.→Oil spikesSupply shock hits immediately. Oil was already $72, $10 above fundamentals.→Gas + shipping upEvery $10 rise in Brent adds ~25¢/gal at the pump. Shipping and freight costs follow.→Broad inflationHigher energy costs feed into food, manufacturing, and consumer goods across the board.→Fed stuckInflation says raise rates. Slowing economy says cut. The Fed can't do both.→Recession riskProlonged high prices choke consumer spending and business investment.

Oil to $90-110, +50¢-$1/gal at the pump for months. Broad inflation. Real recession risk.

Full Regional War
Hormuz disruptedIran blocks the strait. 15m barrels/day, one-third of global seaborne oil, stops flowing.→Oil spikesSupply shock hits immediately. Oil was already $72, $10 above fundamentals.→Gas + shipping upEvery $10 rise in Brent adds ~25¢/gal at the pump. Shipping and freight costs follow.→Broad inflationHigher energy costs feed into food, manufacturing, and consumer goods across the board.→Fed stuckInflation says raise rates. Slowing economy says cut. The Fed can't do both.→Recession riskProlonged high prices choke consumer spending and business investment.

Oil past $120, +$1.25+/gal indefinitely. 1973-level oil shock. Severe global recession.

Every $10 Brent rise = ~25¢/gal at pumpSaudi/UAE bypass pipelines exist, but 8-10m b/d remain exposedSPR: 415m barrels (down from 570m), ~3 months at max drawGoldman worst case: $110/barrelOPEC raised output only modestly on March 1

The most likely scenario (prolonged campaign, ~40%) means months of elevated oil prices, inflationary pressure, and real recession risk if Hormuz stays disrupted. But there’s a built-in counterweight: with midterms in November, sustained high gas prices are a direct political liability for the GOP. The administration has strong incentive to find an off-ramp, which is the best reason to think Declared Victory is more likely than the probabilities suggest 15.

If you’re making big decisions right now (buying a home, allocating capital, planning headcount), the honest answer is: wait a few weeks. The fog clears fast. If oil stays below $85, markets are pricing in a quick resolution and you can proceed normally. If it pushes past $95 and stays there, assume months of elevated costs and plan accordingly. Don’t panic, but don’t ignore it either.

How Does This Affect Global Security?

The consequences of this conflict radiate outward. Each order of effect gets further from Iran but more significant for the world. The immediate military exchange is already giving way to second- and third-order consequences that will reshape global security for years.

US-Israel strikes on Iran. Khamenei killed.

First order hours
Iran retaliates on Israel, US bases, Gulf ports
Strikes hit military, government, nuclear infrastructure
Second order days/weeks

Proxies are the escalation mechanism11121314

Iran's network (Hezbollah, Houthis, Iraqi militias) is what turns a bilateral war into a regional one. Hezbollah is weakened from the 2024 Lebanon war with 'limited options.' But Houthis are intact and have promised to intervene. None have fully activated yet. If the regime collapses, they lose their patron. If it survives, they become more dangerous.

Hormuz and Red Sea close to shipping23242526

For the first time in container shipping history, both chokepoints are shut to commercial traffic. Together they handle ~30% of global container traffic. There is no recent precedent for both being closed at once.

Third order weeks/months

US military stretched thin3031

Two of America's eleven carrier strike groups are committed here, the largest Middle East deployment since Iraq 2003. That's nearly 20% of carrier capacity in one region. The question: what's the posture in the Pacific?

Diplomatic polarization hardens

The geopolitical split (see above) deepens. If Russia increases military support to Iran, or if China decides Hormuz is worth defending, the conflict changes nature.

Fourth order months/years

Nuclear proliferation precedent1272829

Iran's atomic energy agency was a strike target. The signal to nuclear-aspirant states like Saudi Arabia, South Korea, and the UAE: don't wait to weaponize. If they conclude that a bomb is the only deterrent against regime change, the NPT faces its most serious challenge since North Korea.

China reads opportunity in the Pacific

With US carrier capacity diverted to the Middle East, the window for action in the Taiwan Strait looks wider. The security implications extend far beyond Iran.

What to Watch This Week

Two signals matter most. Trump’s next statement tells you the intended duration: “mission accomplished” framing points to Declared Victory, “long campaign” framing points to Prolonged Air Campaign. Iran’s next salvo tells you the intended intensity: calibrated strikes mean they’re keeping the door open, maximalist strikes mean Full Regional War.

Everything else follows from those two:

  • Monday markets: first real oil/equity reaction. Below $85 = markets expect a quick resolution.
  • Hormuz shipping data: how many tankers are actually transiting vs. idling
  • Iran leadership council: who takes charge and what tone they strike
  • Proxy moves: Hezbollah’s first 72 hours will signal if they’re in or out
  • OPEC emergency session: whether Saudi/UAE commit to significant output increases

The next 72 hours will tell us which scenario we’re in. Most of the uncertainty resolves early.

Footnotes

  1. America and Israel bomb Iran, aiming to topple its regime - The Economist, Feb 28 ↩ ↩2 ↩3 ↩4 ↩5 ↩6 ↩7 ↩8 ↩9 ↩10 ↩11 ↩12

  2. Iran Says Supreme Leader Killed in U.S.-Israeli Strikes - NYT, Feb 28 ↩ ↩2

  3. US, Israel attack Iran live - Al Jazeera, Feb 28 ↩ ↩2

  4. New strikes hit Tehran - as it happened - The Guardian, Feb 28 ↩ ↩2 ↩3

  5. U.S. And Israel At War With Iran - The War Zone, Feb 28 ↩

  6. Iran Update Special Report: US and Israeli Strikes - ISW, Feb 28 ↩

  7. What Khamenei’s death means for Iran’s leadership - Politico, Feb 28 ↩

  8. Who Could Take Over for Ayatollah Ali Khamenei? - NYT, Feb 28 ↩

  9. Eight killed as Iranian missile slams into Beit Shemesh - Times of Israel, Mar 1 ↩

  10. US and Israel launch new wave of attacks on Iran - The Guardian, Mar 1 ↩

  11. Hezbollah’s Limited Options for Supporting Iran - ISW, Feb 28 ↩ ↩2

  12. Houthi plans for a US-Iran war worry a weary Yemen - DW, Feb 28 ↩ ↩2

  13. Iran’s proxies say they’re ready to respond - Fox News, Feb 28 ↩ ↩2

  14. How the World Is Reacting to the Attack on Iran - TIME, Feb 28 ↩

  15. World leaders react cautiously to strikes on Iran - PBS News, Feb 28 ↩

  16. Russia accuses America of ‘unprovoked act of armed aggression’ - Fortune, Feb 28 ↩

  17. Bombing of Iran ‘a grave threat to international peace’: Guterres - UN News, Feb 28 ↩

  18. War in Iran could cause the biggest oil shock in years - The Economist, Mar 1 ↩ ↩2 ↩3 ↩4

  19. US-Israeli strikes risk igniting regional war - France 24, Feb 28 ↩

  20. Hormuz Blockade and Houthi Resumption Close Both Middle East Chokepoints - Container Magazine, Mar 1 ↩

  21. Ships Avoid Hormuz as Iran Raises Threats, Conflict Spreads - Bloomberg, Feb 28 ↩

  22. After Iran Attacks, Ship Traffic Plummets in Strait of Hormuz - NYT, Feb 28 ↩

  23. Iran attacks prompt Red Sea rethink as box shipping exits Strait of Hormuz - Lloyd’s List, Feb 28 ↩

  24. US military assembles largest force of warships, aircraft in Middle East in decades - Military Times, Feb 26 ↩

  25. 2026 United States military buildup in the Middle East - Wikipedia ↩

  26. The North Korean Way of Proliferation: What Aspiring Nuclear Powers Learned - Foreign Affairs ↩

  27. In 2026, a Growing Risk of Nuclear Proliferation - Just Security ↩

  28. The war won’t end Iran’s nuclear program, it will drive it underground - The Conversation ↩