Our initial reaction to the latest war in the Middle East was that it isn't likely to last long. However, wars are hard to predict. The fog of war can be very disorienting. The US and Israel killed the top leaders of Iran's regime during the first day of their attacks on the country. So we thought that might set the stage for a short war. However, the regime's Islamic Revolutionary Guard Corps (IRGC) is still fighting to protect the Islamic Republic from both external threats and internal ones (including the regular army and a popular revolution). It is a branch of Iran's armed forces established shortly after the 1979 Islamic Revolution. It is one of the most powerful and influential institutions in Iran.
The United States designated the IRGC as a Foreign Terrorist Organization (FTO) in April 2019 — the first time the US had made such a designation against a government entity. These terrorists are likely to be hard to eradicate with just air power. Their threats to attack ships sailing through the Strait of Hormuz have effectively closed the sea lane through which vital oil and gas supplies are shipped around the world.
President Donald Trump today responded to soaring oil prices by ordering the United States Development Finance Corporation to provide maritime risk insurance and said that the US Navy will begin escorting tankers through the Strait "if necessary." Brent crude oil, which traded above $85 a barrel this morning, fell to $79 and closed above $81 (chart).
Rapidly rising oil prices have a history of causing recessions and bear markets in stocks (chart). That was not the case in 2022, when oil prices spiked, and the economy continued to grow, yet there was a bear market. The longer the war lasts, the more likely it is that the oil price shock results in stagflation. The Fed would be frozen as the risks of higher inflation and higher unemployment both increase.
