US-Iran Tensions: Implications for Iran and Oil Prices

Iran Facing Capitulation or Confrontation

The US has essentially given Iran two choices. The first, accept ending enrichment of uranium, get rid of long-range ballistic missle program, end support for regional Iranian proxy groups and treat Iranian citizens better. In short, the first choice means that Iran has to dismantle its security thus weakening the Iranian regime and its hold on power. The second choice is confrontation. Which will Iran choose?

Tehran increasingly sees war with the U.S. as likely and may prefer or accept it as a means to change the strategic environment. Distrust of the U.S.—especially after President Trump withdrew from the 2015 nuclear deal, reimposed sanctions, encouraged anti‑regime protests, and green‑lit strikes—means Iran’s leaders doubt U.S. offers and fear they demand total disarmament that would make regime change likely.

Rather than trust diplomacy, Tehran is preparing to manage and possibly endure a protracted conflict, hoping war will produce outcomes more favorable than concessions. That gamble is dangerous and could lead to catastrophic consequences, but it should not be dismissed as irrational bystanders: it reflects a calculated, if risky, strategy by a regime under severe internal and external pressure. Key points:

• Deep mistrust: Iran’s leadership distrusts the U.S. because of past actions (exit from 2015 deal, sanctions, encouragement of protests, and support for strikes).
• Diplomacy scepticism: Tehran sees recent U.S. demands as effectively seeking full disarmament, which the regime believes would invite collapse or regime change.
• Preparing for war: Rather than primarily trying to avert conflict, Iran is preparing to manage and possibly exploit a prolonged war to alter strategic conditions and mobilize domestic support.
• High stakes and risks: The approach risks catastrophic destruction and escalation (regional proxy attacks, strikes on oil infrastructure), but Iranian leaders may view prolonged conflict as improving their bargaining position or survival prospects.

Iran Dangerously Misreading the US and Trump

Tehran misreads how Washington negotiates, risking dangerous miscalculations. Iranian leaders keep treating talks as part of a familiar 2015-style bargaining model despite major geopolitical shifts—post‑Ukraine war dynamics, U.S. impatience, recent regional conflicts, and diminished Iranian leverage after strikes and sanctions. That complacency and confidence in outwaiting the U.S. could lead to a costly miscalculation if Washington’s tolerance for delay or its appetite for military pressure proves limited. Key points:

• Iranian strategists expected external events (e.g., Europe’s energy crisis after Russia’s invasion of Ukraine) to strengthen their leverage; those expectations largely failed.
• Tehran often assumes U.S. negotiators follow old institutional rhythms and can be worn down by delay—an assumption at odds with signs of U.S. impatience and faster, less predictable decision making.
• Recent wars and strikes have eroded Iran’s regional bargaining power and altered the strategic environment that produced the 2015 JCPOA; that model is unlikely to be repeatable.
• Iran faces a dilemma: accepting U.S. demands (especially on ballistic missiles) threatens core defensive doctrines, while rejecting them risks escalation; internal political divisions compound the danger.
• The real risk is mutual brinkmanship: both sides believe the other will blink first, and a misread of intent or timing could trigger an unintended, costly conflict.

Implications for US allies in Region

U.S. threats of military action during Iran’s December 2025–early 2026 protests exposed a shifting Middle East balance. Rather than encouraging regime change, the U.S. stance prompted regional rivals—most notably Saudi Arabia and Turkey—to rally behind the Iranian regime out of fear that collapse (or a pro‑Western replacement) would unleash ethnic conflict, empower Israel and the U.S., and destabilize critical security and economic interests. For example, Turkey fears that a collapsed Iranian regime could result in Iranian Kurds pushing for seperatism.

Thus, the desire to preserving the regional status quo drove these states’ responses that a major U.S. strike could produce far‑reaching, unpredictable geopolitical consequences. Key Summary Points:

• S. threats of intervention during large 2025–26 Iranian protests caused unexpected alignment: Saudi Arabia and Turkey publicly sought to deter regime change to avoid worst‑case consequences.
• Both Riyadh and Ankara feared a post‑regime scenario that would increase Israeli and U.S. influence (notably via figures like Reza Pahlavi) and exacerbate minority/ethnic uprisings inside Iran.
• Ethnic fragmentation (Kurds, Azeris, Arabs, Baluch, Turkmen) makes Iran vulnerable to renewed conflict if central control collapses, raising refugee, security and regional contagion risks—especially for Turkey and Gulf states.
• Saudi Arabia prefers a weakened but intact Iranian state over chaotic collapse or a pro‑Western government, to protect trade routes, economic projects and regional stability.
• The episode highlights a tug‑of‑war between preserving an old “status quo” led by established regional powers and emerging blocs (e.g., UAE, Israel, Azerbaijan) whose interests may push future realignments.

Oil Price Implications

If Iran manages to shut down the straight of Hormuz this would significantly boost oil prices. About 20% of the world’s oil goes through the strait. Oil prices yesterday jumped to over $71 USD.