It is still early and much remains unknown. But enough has happened to outline the contours of the risk – and the shape of the distribution – that geopolitics and markets will face in the aftermath of the war in Iran.
1/ The United States and Israel have adopted a maximalist strategy with a high-risk, high-reward targeted strike. From a tactical point of view, it appears to have been very successful. Reportedly, nearly fifty members of the Iranian high command, including the Supreme Leader, were killed or neutralized in the first wave. Whatever happens next, there should be no doubt about the overwhelming superiority of the intelligence, surveillance, and strike capabilities of the United States and Israel.
2/ From a strategic perspective, however, we are in a vacuum. We have heard conflicting formulations about the desired end result. Is it regime change? Creating conditions for regime change? Or further weakening Iran’s nuclear capabilities and ammunition supply chain? These are very different objectives, with very different exit strategies and strategic and financial implications. If the goal lies at the more ambitious end of this spectrum, I count myself among those skeptical that regime change can be achieved through a limited-duration, however spectacular, air campaign.
3/ In this context, all we can say with certainty is that the bands of uncertainty have widened considerably at both ends of the probability distribution. The range of plausible outcomes has expanded to include both the possibility of an exceptionally constructive resolution and that of a highly destructive one. Markets are being asked to price a much wider range of scenarios, with very little reliable information on the likelihood of each or the intermediate path.
The determining factor is whether Iran will be able to turn a localized conflict into a systemic shock, disrupting physical energy flows or expanding the conflict horizontally through proxies, cyber operations, or attacks on regional infrastructure.
4/ To be clear, the positive scenario – a kind of “Persian renaissance” – would be unprecedented. Iran could be on the verge of replacing a brutally repressive regime that has terrorized its people and destabilized the region for nearly half a century. The benefits would be enormous: humanitarian aid for the Iranian people, a significant reduction in the risk of regional conflicts, and a substantial redrawing of the global strategic map. The elimination of Iran as a destabilizing force would allow the United States to focus resources on Asia, their primary long-term strategic challenge, further consolidating control over global energy supply. The United States, Canada, Mexico, Venezuela, and Iran together represent about one-third of the world’s oil production and an even larger share of spare capacity and reserves. Regarding markets, it is important to emphasize that this outcome was hardly conceivable just a week ago. If it materializes, it would lead to a strong rally.
5/ But to achieve this enticing outcome, a credible execution plan is necessary after the end of the bombings. This means a strategy supporting a peaceful transition to a regime capable of unifying and stabilizing the country on a path of moderation. This is much easier said than done, for several reasons. First, it is doubtful that the Venezuelan model is transferable to Iran. Its system of government is more decentralized, more ideologically rooted, and explicitly designed to survive decapitation. The regime has built levels of redundancy in a vast military-industrial complex precisely for this moment. Second, it is by no means certain that a Delcy-like figure will emerge from the rubble to lead a succession regime. And third, the results achieved by the United States in national reconstruction in the Middle East, or anywhere else, are, at best, mixed. I therefore believe the odds of a successful leadership transition do not exceed 25%.
6/ So two other scenarios remain. The first is my base case: “We broke it, you fix it.” In this scenario, the United States and Israel succeed in overthrowing the current regime – there is no doubt they have the military superiority to do so – but are not politically willing or able to commit the resources and take the risks necessary to lead a lasting transition. The result is a prolonged quagmire of factions involving remnants of the IRGC, elements of the regular army, and rival ethnic and regional groups.
In this scenario, the market impact seen so far would likely fade, as the conflict would increasingly be viewed as localized. This would be especially true if the United States and the IEA were willing to release oil from strategic reserves and OPEC continued to increase supply as needed to avoid a sustained rise in Brent. Even so, this outcome would likely exert a modest but persistent negative impulse on risky assets, as markets would still have to assess the dangers of a destabilized Iran at the doorstep of the world’s most sensitive energy hotspot. I assign this scenario a 50% probability.
7/ The worst outcome for financial markets is a war of attrition in which the existing regime, though decapitated, ultimately prevails: a kind of “hydra” resistance. In this scenario, Iran digs in, prolongs the conflict, and expands its footprint. It intensifies attacks on regional neighbors, targets vulnerable civilian infrastructure, sabotages (or seriously threatens to sabotage) energy resources, activates terrorist networks abroad, and launches cyber operations to inflict asymmetric damage. All this would aim to exhaust Washington’s political will and provoke a premature declaration of victory.
In such a context, transit through regional energy chokepoints, particularly the Strait of Hormuz, through which about 20% of globally traded oil passes, could suffer prolonged disruptions. Even without a physical closure, the skyrocketing insurance premiums against war risks or revocation of coverage could be enough to divert shipping routes and reduce effective supply. Brent could reach or exceed $100 per barrel. The market consequences would be familiar: risk aversion, rising rates, and flight to quality, modulated, as always, by the sensitivity of individual economies to rising oil prices. I assign this scenario a 25% probability.
8/ It is worth remembering that over recent decades the global economy’s sensitivity to oil shocks has changed significantly. The United States is now the world’s largest energy producer and a net exporter. As a result, the economic effects of rising oil prices, which mainly reflect on investment and energy consumption, largely offset each other, with a net impact of ±10 basis points on GDP growth. Regarding inflation, a sustained $10 increase in Brent typically adds about 20-30 basis points to overall PCE, but only about 5-10 basis points are likely to pass through to core inflation, mainly via energy-related services.
For oil-importing economies in Europe and Asia, the risks resemble a textbook supply-side shock: higher inflation, tighter financial conditions, weaker real incomes, and lower growth, with nonlinear effects as prices rise. Conversely, oil-exporting economies, including Russia, much of the GCC, and some parts of Latin America, mechanically benefit from higher prices through improved terms of trade, stronger fiscal balances, and increased external surpluses. This tailwind persists until energy prices rise enough and long enough to trigger demand destruction, at which point the vicious cycle turns negative for all.
9/ What does this imply for central banks? The standard strategy is to “look through” supply-side shocks unless inflation expectations become unstable or second-round effects (e.g., financial conditions, confidence) significantly weaken growth prospects. In the United States, the most likely response from Powell’s Fed would be to confirm a prolonged pause, while other major central banks will also seek to buy time, waiting to assess the duration and severity of the shock before changing course.
If the conflict persists and intensifies, the uneven exposure to energy prices across economies would lead to growing divergence in monetary policy paths, with significant consequences for exchange rates. If the Fed were to ignore the shock while energy-importing regions could not, such monetary policy divergence would accelerate the trend of dollar depreciation.
10/ In terms of long-term impact, it is important to emphasize that war is one of the bluntest tools available to policymakers, both economic and military. It triggers second-order effects impossible to anticipate or predict in advance, and this episode will be no exception. It also underscores that the global economy is now caught in a tug-of-war between two powerful and opposing forces: on one side, the promise of a technology-driven productivity boom, unique in a generation (or a century), that could increase trend growth, contain inflation, and support a nirvana version of financial markets; on the other, a fragmented geopolitical landscape characterized by more frequent conflicts, economic wars, energy insecurity, rising military spending and fiscal dominance, growing nuclear proliferation risk (to avoid Iran’s fate), and the example that “might makes right” in an order based on outcomes rather than rules. Which of these forces will ultimately prevail is the defining macroeconomic question of our time.
