On Sunday evening President Trump publicly and vehemently rejected what limited overtures of peace the Iranian regime had sent via Islamabad. This was, of course, a surprise to absolutely no one. The ceasefire and the pausing of ‘Project Freedom’ was nothing more than a press release, designed to calm markets. The only thing the Trump administration seems to fear, it also acted as a signal of strength to China ahead of the Trump-Xi summit. There will be other diplomatic missives, ceasefires, and threats but they will all obscure the core point of the Iran war. That the United States cannot leave with terms that they will find acceptable, and that Iran have no incentive to give in to American maximalist demands. Because the Iranians hold more cards than anyone posting on Truth Social would be willing to admit. With this in mind it is important to understand that the Iran War is entering a new stage of conflict, albeit underpinned by the same strategic logic.
Changing American Strategy
That new stage is one that has been present in war ever since humanity got tired of wandering around and built homes with walls to keep their enemies out, a siege. The United States military playbook has often used a form of siege tactics to starve their targets into submission. This often took the form of excluding the target from the global economic system rather than a military action; see Fidel Castro. However the US have spent the last decade either passively watching the multilateral system crumble, or actively dismantling it. Where during the Gulf War the United States could count on a united allied front, they are now forced to wage economic warfare against Iran by themselves. Rather than the VLCCs laden with Iranian oil being turned away from ports by nations too scared of the US’ economic wrath, the US navy must now put itself in harms way due to the degradation of every other weapon that could have been brought to bear. Secretary Rubio’s statement pivoting the American war aim to guaranteeing the freedom of the seas is a tacit admission that the original goal of regime change has failed. As well as being an unsubtle attempt to reframe the US’ position as a defender and attempt to construct a coalition.
Strategic Patience
The new American War strategy is one of strategic patience, maintaining their operational intensity was unsustainable. The damage that Iran could do to American allies in the Gulf, and therefore the global economy meant that there needed to be a rethink. Beyond disengaging the larger military assets, like the carrier groups, the degradation of the US’ ability to intercept Iranian projectiles means that remaining in this limbo-like state of a naval blockade and holding a low kinetic tempo is to the United States’ advantage. The aim is to put pressure on the Iranian system, in particular their oil industry and their currency. So far, the Iranian Rial is under severe pressure and inflation within Iran is noticeable and causing some unrest. Since the twelve day war last year and the beginning of President Trump’s campaign against Iran, the Rial has lost 68% of its value. However the Iranian oil industry is proving resilient. Moreover, the original US intelligence that Iran’s industry would collapse in short order has been corrected to show that the Iranian regime could last months without undergoing catastrophic failure, as well as maintaining a fully operational missile and drone stockpile.
Iranian Resilience
That stockpile is already being put to good use, in response to US interdiction of the Iranian Navy last week, the Iranians struck Fujairah, one of the key ports for the UAE outside of the Strait of Hormuz, and thus a key path for at least some oil to exit the region. This reveals something crucial about the Iranian negotiations, their capacity to damage the rest of the region is their leverage, not the Hormuz tollbooth. If the US are committed to the concept that this war is about the freedom of the seas, there is no amount of diplomacy that will lead to a lasting peace. The US cannot afford to look weak, particularly given the China summit, and the precedent that nations can block the seaways at will wouldn’t exactly project strength. A world where there is a revanchist Egypt and Turkey blocking Suez and the Bosphorus respectively, and perhaps even a militant Malaysia mining the Malacca narrows, is not one where the United States are in control. However, this war is not about that, the war has always been about regime change and pivoting Iran away from China. The failure of the bombing campaign and the shift to Iran’s guerrilla economic warfare was a strategic failure from the moment that the regime survived the death of the Ayatollah.
Compellance
That being said, although the US are shifting to siege tactics, away from the highly kinetic airstrikes and the threat of ground troops, they both come from the same strategic intellectual lineage. The strategy is compellence, giving Iran an off-ramp (a US favorable deal) while threatening them with destruction and suffering. The issue with the current administration’s interpretation of this is threefold. First, as mentioned earlier, American intelligence estimates have been overly optimistic regarding how much punishment Iran can withstand. Second, the US aren’t providing an offramp that the Iranians can realistically take and have the regime survive; so they wont take the deal. Compellence doesn’t work when the aggressive power is bent on humiliating the defender. And Third, the Americans are underestimating the damage that Iran can inflict on the global economy, and how quickly they can escalate the conflict. This last part is particularly important as the narrative surrounding this war often relegates the Gulf states to observers, but their economic suffering along with that of America’s European and Asian allies will be a large factor in the outcome of the Iran War.
The Shifting Axis
Two of the most crucial moments in the war, and ones that represent seismic shifts in both regional and global security have happened in the past few days. The first, which demonstrates a fracture in the security architecture of the Middle East, was the denial of airspace to the US by both Saudi Arabia and Kuwait. This was a pointed message, the rollback of Project Freedom, as well as the downplaying of the renewed assault on Gulf infrastructure have challenged the fragile coalition that has been in existence since Trump I, and the Abraham accords. That architecture was reliant on US support, and gave tacit acceptance of Israel and its security concerns, but it was fundamentally not led by Israel. American actions have given the impression that the new ‘Axis of Abraham is more about an Israeli led security system which is incompatible with the Saudi view of the region. While this will happen slowly, the repolarisation of the Middle East has begun. It has already been taking shape with the Saudi development of their Quadrilateral alliance system, of Egypt, Turkey and Pakistan, a system that magically surrounds both Israel and Iran with powers aligned to Saudi Interests. This is an extension of the Saudi hedging that was referenced in Deep Dives #1, because the Saudis are not pivoting towards Iran, but rather towards strategic autonomy.
The Role of China
A key part of this autonomy comes from the presence of China as an alternative trading partner and security ally to the United States. This shift has been occurring for some time. In 2024 China’s investment in Saudi Arabia increased by nearly 30% to $8.2 billion and the Saudi Public Investment Fund has signed a $50 billion deal with major Chinese financial institutions covering petrochemicals. Furthermore, China is now Saudi’s largest trading partner, equivalent to 90% of Saudi Arabia’s total trade volume with the entire G7 combined. China’s role in creating the conditions for the erosion of American security architecture is an important one. China’s relationship with Iran is also very close, and further polarisation could easily lead to Israel being the last US ally in the region, and the rest either strategically neutral or even aligned with China. It’s not for nothing that the Iranian tollbooth is denominated in Yuan. The ‘Petroyuan’ was a direct challenge to the US led system, but the second crucial moment is just as serious a threat if not more so.
Collapsing Sanctions
In retaliation for Chinese operational support for Iranian military operations, Secretary Bessent announced sanctions on several Chinese Firms accused of buying Iranian Oil. In an unprecedented move, the Chinese government denounced these sanctions, as well as compliance with the sanctions, as illegal. This is two crises wrapped in one, a challenge to the entire US sanctions architecture, and a complex decision for nations doing business with both the US and China, leaving affected companies open to legal action in both China and the US depending on who they obey. This is a further consequence of the weakening of the US led global order, by using it, and damaging it the way they have the US have invited an open challenge to their position as irreplaceable trading partner. As well as, through the Petroyuan, a challenge to their currency. China are actively dismantling the tool that won the US the Cold War, by forcing a decision on whether the cost of compliance is higher or lower than the cost of ignoring the US sanctions orders. However, returning to the Iran conflict, if sanctions on Iranian oil can be ignored the entire economic logic of the siege begins to collapse. So the US will have to maintain a military blockade, putting lives at risk, and choking the global economy until they either get a favorable deal, or Iran finally run out of hard currency. The markets however, are not pricing any of this correctly, and the gap between where oil futures are and the state of the Middle East is not so much a disconnect as a gaping chasm.
The Markets
To understand what is likely to happen to the price of Oil and in the Strait of Hormuz, it is wise to look at the actions of Aramco. Prior to the Iran War, as the US military presence in the Gulf rose, Aramco raised production and sent oil to storage facilities in Alexandria, Egypt, and Rotterdam, The Netherlands. On May 11, the CEO of Aramco said that every week the Strait of Hormuz is closed, the market loses 100 Million barrels of oil. For context, the US SPR release was 172 Million barrels. There is, due to this shortage, a disconnect between oil futures and the spot (real) price of oil. Even after the American rejection of Iranian demands, the future price of oil is hovering around $98-101, when the price of a barrel is actually $135. This tells us that the market is pricing this ceasefire in as permanent.
The Oil Disconnect
There are in fact three main reasons that oil is currently wildly underpriced. The first is that the market is reacting more to President Trump’s rhetoric than to the geopolitical realities in the Middle East. At the Milken Conference, one banker was heard to say “Does anyone really care if the Strait of Hormuz is open?”. The markets are pricing a resolution that simply doesn’t exist. Ali Vaez, a lead analyst on Iran said ‘Both sides would either have to make painful concessions or leave the main areas of disagreement vague if they are to finalise a framework understanding’. The second reason is that the market is pricing the deal as being one that President Trump wants, not one in which the Hormuz Tollbooth is a permanent feature, and the strait is laced with smart mines allowing Iran to shut it at will. Third, and probably most importantly, is that the Fujairah strikes, and President Trump’s rejection of Iran’s offer means that the kinetic tempo is about to go up. This will place Gulf Infrastructure under more pressure and further damage the global economy, particularly as the US is not well placed to defend her allies from further barrages.
The 1970s all over again
The permanence of the Hormuz tollbooth has the potential to have the greatest long term impact on oil prices. In the same way that the nationalisation of oil fields in the 1970s led to a fundamental change in the way that the Oil Majors operated, the presence of the tollbooth could shift the way that oil moves around the globe. Between the formation of OPEC, and the manner in which after costs are recouped the majority of oil wealth would go to the nation holding the oil equities, the changes of the 1970s dealt a huge blow to the global economy. These reassertions of physical control caused a decade of inflation and two recessions. But where the 1970s were about the control of one resource, the 2020s could end up being about the control of the passage of all of them. If the United States capitulates on the tollbooth and thus sets the precedent that sea lanes can be shut at will, the shipping industry will react in a similar vein as Exxon and its cohort did back then. By passing the costs on to the consumer. It could be argued that this is decolonisation taken to an extreme. Iran’s propaganda that it is standing up to the imperialist West shows that this argument is not going away. That the strategic infrastructure captured, and the precedents set during the apogee of the West are not going to be respected. This possibility, or even just the idea that 20 million barrels of oil a day will be stuck behind a tollbooth, has not been priced into the market. The malignant optimism that has infected American strategic thinking has made its way from the White House to Wall Street.
Conclusion
The market should in fact be pricing oil as if this conflict is not slowly winding down but rather as if it is moving to a new phase. There has been a shift in American tactics, from kinetic bombardment to naval siege, but the underlying strategy has remained the same. The historical irony that the abandonment of global norms and system the US spent so long building is what’s causing it so much grief at this moment should not be ignored. Bretton Woods, NATO and the Petrodollar all existed to advance American interests but now the US is wholly reliant on kinetic force. Iran entered this war as a slowly collapsing Theocratic state, but the United States, by creating these siege conditions is not creating the conditions for change but rather forging it into something new, a Praetorian revanchist power, as we argued in our SitRep. So it doesn’t matter exactly when the war ends, the Middle East it is ending into is fundamentally altered. The post Iran War landscape will likely have an Iranian tollbooth on Hormuz, a cooling Saudi-US alliance, and a hole below the waterline on American sanctions architecture. Regardless of the deal they get, America will struggle to claim a credible victory.
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