If the world is to avoid a global recession, it will come down to one thing. The reopening of the Strait of Hormuz. Around 20% of the world’s oil and roughly a quarter of global LNG flows through that narrow passage. It is not just a geopolitical pressure point. It is one of the most important economic arteries in the world.
The problem is that the ball is well and truly in Iran's court, and it is effectively the only meaningful card they have left to play. They have absorbed significant economic and military pressure and have not capitulated. Having endured that level of strain and still holding its position, it is unlikely to give up the one lever that genuinely shifts the balance of power. The Strait is that lever.
So why would Iran reopen it? Not out of goodwill, and not simply because of pressure. They will only do so if the incentives are compelling enough. That likely means some combination of sanctions relief, de-escalation, or at the very least recognition of the strategic leverage they have demonstrated. Without that, reopening the Strait voluntarily makes little sense from their perspective.
How it plays out it from here might simply come down to who blinks first. At first glance this looks like a contest of military strength, but it isn’t. It is a contest of endurance and the longer this drags on, the more the economic consequences compound. Energy prices rise, supply chains tighten, and confidence falls. What started as a geopolitical conflict has already morphed into an economic one.
Iran can withstand pain and has done so for decades under sanctions. The United States faces different constraints. Political pressure, market pressure, and voter pressure. Trump may have overestimated the brute strength of the US military as a strategic advantage. Consequently, Iran is now using their position to drag this out and create chaos for the global economy.
There are few topics that generate as much concern globally as the price of fuel. A spike is a cause for concern. A sustained spike will quickly morph into outrage. In the middle of a cost of living crisis, an energy shock hits discretionary spending hard. Making matters worse, as the prospect of higher prices and inflation leads to central banks increasing interest rates. That's the double hit and we are already seeing that play out here in Australia.
The second-order effects are where this becomes more dangerous. It’s not just oil. Fertiliser markets begin to tighten, pushing up agricultural costs and ultimately food prices. Industrial inputs like helium, critical for medical and semiconductor industries, become constrained. Shipping costs rise as routes are disrupted and insurance premiums spike. The longer the Strait remains compromised, the more these pressures ripple through the global economy. This is how a shock turns into something more systemic, slowing global growth and the possibility of recession.
Allies are reluctant to join Trump in this conflict. It appears many are happy to keep their distance, ensuring that at the end of this it is clear where the blame rests. This is a USA decision. This is a Trump decision. His problem right now is that there is no obvious solution and not one that he can easily control.
From here it may well be Trump who is more desperate for this to end. He can declare victory and manage the narrative but unless the Strait reopens and the supply of commodities is restored then he has a problem. One that the world knows he has created and one that he needs to fix. He knows this.
Iran knows this too.
They want the world to understand the strength of their position and their ability to inflict economic pain on the world if they so choose. The question is how deeply they want the world to feel that pain. Push too hard and they risk uniting the world against them. The most likely path is controlled pressure. Enough to make the point but not enough to become the clear villain. They will want Trump to be seen as the problem, not move so aggressively that they are seen as the problem.
That said, Trump is nothing if not a creative problem solver. He is also unpredictable. So, it would be unwise for Iran to push Trump too hard or for markets to underestimate his ability to manoeuvre out of difficult situations. Push too far and his response may not be linear.
From an investor’s perspective, this is much less about the war itself and far more about the reopening of the Strait. Markets have shown they can absorb conflict. What they struggle with is sustained disruption to critical supply chains, particularly energy. The key variables to watch are simple. The duration of the disruption, the trajectory of oil prices, and any credible signals that shipping flows are normalising.
I still think this is resolved in a reasonable timeframe. There will be economic consequences, and some of them will linger. But as is often the case, it won’t be the conflict itself that does the real damage. It will be the bottleneck. Right now, markets are underestimating just how powerful that bottleneck is.
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