Iran didn’t want this war, but now it has reasons to prolong it. That’s a problem for President Trump, who appears unable to reopen the Strait of Hormuz despite his threats. It’s a problem for the global economy, which is buckling under a surge in energy costs. It’s a problem for Gulf leaders hemorrhaging oil revenue. And it’ll haunt future American presidents: Hormuz has been closed once; it can be closed again.
Despite the climbing death toll and destroyed infrastructure, surging oil prices are cushioning Iran’s economy against the war’s costs. Iran has met virtually every strike with a counterstrike, every threat with a matching threat. Its leaders’ logic is cold but calculated: make this war so costly for everyone that no one wants to start another. For Tehran, the goals are simple. The Islamic Republic must survive this moment and ensure it is not attacked by the United States and Israel again. To achieve this, Iran believes it must impose a cost — to the United States and Israel, to the Gulf states’ image of stability and to the global economy. So far, it’s succeeding: Iran has learned how easy and comparatively cheap it is to hold the global economy hostage.
For Tehran, the moment is existential. It faced years of economic hardship as sanctions and mismanagement resulted in high inflation and a weaker currency. It also faced political and legitimacy crises — both worsened by the brutal repression of protests, as well as social and environmental pressures so severe that dire water shortages prompted the country’s president to warn Tehran might have to be evacuated. Then came the American and Israeli onslaught in which officials from both countries talked openly about regime change in Tehran.
That situation led to Iran’s response: ruthless, step-by-step escalation. Unlike the short war in June, the escalation wasn’t symbolic. Iran continues to hit the Arab Gulf states where it hurts, from energy to tourism. Tehran now holds the global economy hostage by choking off the Strait of Hormuz — a move it long threatened but never before executed.
Some saw these moves as unjustified; Tehran saw them as carefully calibrated. At the beginning of the war, the Iranian military hit regional energy infrastructure to sabotage production, taking some of the region’s production temporarily offline. But it was only when Israel conducted an attack against Iran’s South Pars gas field on March 18 that Iran went for the jugular. After the Israeli attack, Iran targeted energy infrastructure in Qatar, the United Arab Emirates and Saudi Arabia, seemingly aiming to cause longer-lasting damage. The hit on the world’s largest liquefied natural gas export facility was so significant that it is likely to cause an estimated $20 billion of lost revenue and five years of repair. Iran demonstrated it was willing and able to retaliate in kind.
Iran is doing all this on the cheap. It uses a mix of relatively low-cost drones and missiles to overwhelm its adversaries’ defenses. Those defenses are more expensive: Iran is deploying drones worth $20,000 to $50,000 against interceptors worth more than $4 million. It’s also using mines, drones and explosive-rigged boats to scare off shipping in the Strait of Hormuz. Put simply, Tehran is on the right side of the cost curve. And while Iranian munitions aren’t unlimited, the country’s military is getting better at striking targets as the war goes on. They might be shooting less, but they’re shooting better.
This dynamic has created two advantages for Iran. First, high oil prices are hurting the United States but strengthening Iran’s hand. This led to the Trump administration’s paradoxical policy of relaxing sanctions on Iranian oil. Second, the closure of the strait is less damaging to Iran than to its neighbors. Iranian oil exports have fallen only modestly since the war began, while its neighbors’ exports have tumbled. With the jump in crude prices, Iran is probably earning more from its oil today than it did before the war. Even the country’s long-troubled currency has gained ground.
All this comes at a cost. Iran continues to sustain heavy bombardment, affecting residential areas and its energy grid. Tehran has antagonized its neighbors, several of whom are now calling for Trump to finish the job. While Iran’s strategy initially surprised its adversaries, over time, everyone will adjust. The Gulf may find alternatives to the strait, investing in diversion routes and pipelines. The United States and regional powers will most likely prepare plans to prevent future closures of the strait. None of this will help Iran’s new rulers stay in power. Once the war is over, they will still have to contend with their internal economic, political, social and environmental crises — as well as the deaths of many of their fellow leaders.
Iran didn’t want this war, but it has learned how to use it. The Strait of Hormuz is a major vulnerability to the global economy. Tehran will remember the value of being able to close it. That leverage won’t fix its deep domestic problems. But it will anchor the United States more firmly in the Middle East, despite years of talk about pivoting away from the region.
Dina Esfandiary is Middle East geoeconomics lead and Ziad Daoud is chief emerging markets economist at Bloomberg Economics.
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