The impasse in U.S. President Donald Trump’s war against Iran has now lasted for so long that even jokes about Groundhog Day have grown stale. Recent months have seen rounds of punishing airstrikes, followed by announcements that peace talks are resuming. None of this has moved the needle.
Now the administration has returned to another dated strategy: maximum economic pressure, or as U.S. Treasury Secretary Scott Bessent has put it, an “economic D-Day” against which Iran cannot hope to stand. The administration seems to believe time is on its side, and that the ongoing blockade and sanctions on Iran’s trading partners will succeed where bombing has not.
The impasse in U.S. President Donald Trump’s war against Iran has now lasted for so long that even jokes about Groundhog Day have grown stale. Recent months have seen rounds of punishing airstrikes, followed by announcements that peace talks are resuming. None of this has moved the needle.
Now the administration has returned to another dated strategy: maximum economic pressure, or as U.S. Treasury Secretary Scott Bessent has put it, an “economic D-Day” against which Iran cannot hope to stand. The administration seems to believe time is on its side, and that the ongoing blockade and sanctions on Iran’s trading partners will succeed where bombing has not.
But this is a dangerous game. And the fact that escalation and dire global consequences have been largely managed up to now makes that danger greater, not smaller. The war has dragged on in part because its economic consequences have remained manageable, yielding misplaced confidence that they will stay that way.
During the Cold War, strategists identified what became known as the “stability-instability paradox.” Once the United States and Soviet Union possessed the ability to destroy each other with nuclear weapons, direct superpower war became almost unthinkable. Yet the ironic result was not a stable and predictable peace. Confidence that neither side would deliberately start a nuclear war actually created more room for competition below the nuclear threshold: proxy wars, covert operations, military interventions, and regional crises.
Yet conflict below the nuclear threshold could and did escalate. Proxy wars drew direct superpower involvement. Conventional confrontations triggered nuclear alerts. The very confidence that catastrophe was too irrational for either side to permit encouraged the risk-taking that made catastrophe more likely.
We are seeing something similar right now.
Markets have absorbed an extraordinary disruption since the U.S.-Israeli war on Iran began in February. The overnight loss of as much as 20 percent of global oil production did not cause a worldwide economic meltdown. Prices rose, supply chains shifted, and governments released reserves.
That’s largely thanks to mitigation measures put in place since the first major oil shock in 1973. Bypass pipelines, releases from strategic petroleum reserves, and the growth of new, greener technology all contributed. Some poorer countries experienced shortages and rationing, but there was no global collapse.
The relatively mild impact also relied a lot on luck. The market was oversupplied prior to January, and drawing down so-called floating storage, a euphemism for sanctioned Russian and Iranian oil tankers trapped at sea, in effect added to global reserves. Chinese policy choices were pivotal: Beijing had been aggressively buying excess oil to fill its own reserves before the war, allowing it to cut imports by as much as 5.5 million barrels per day.
Through this combination of planning, adaptation, and luck, oil traders have remained mostly sanguine. The milder-than-expected shock in oil prices has reinforced a broader assumption that somehow the war will end before a genuine crisis hits. Even the collapse of the cease-fire into an untidy tit-for-tat of airstrikes and the administration’s apparent commitment to long-term economic pressure have done little to dent that confidence.
But surviving one stage of a crisis does not tell us where the next stage will lead.
That is where the lesson of the stability-instability paradox comes in. In Cold War crises, no one could predict with confidence which might cross the nuclear threshold, which is what made them so dangerous.
The same uncertainty hangs over the current energy crisis. We do not know how long the war will continue, whether traffic through the Strait of Hormuz will improve or deteriorate, whether additional infrastructure will be struck, or whether some new political or military development will suddenly change the calculus for Washington, Tehran, or other actors.
What we do know is that the economic damage so far is substantial. Oil prices today are hovering around $90 a barrel. With energy embedded in every part of the global economy—from fertilizers to manufacturing, refrigeration, and food processing—higher oil prices travel quickly into consumer prices. Inflation over the past half-year in the United States averaged almost 3.5 percent, above the Fed’s target and historical average consumer price index growth, while inflation globally is also rising.
Meanwhile, most buffers that made the initial shock manageable are depleted. U.S. strategic petroleum reserves are now at their lowest level since the 1980s. Some traffic continues to flow through the Strait of Hormuz, but today’s oil volumes compare unfavorably with the cease-fire period, and even more so with the prewar period. Gulf energy production remains partially closed, while threats from Yemen’s Houthis could endanger oil traveling via bypass pipeline.
Normally, scarcity would draw capital toward new supply and alternatives. But investors betting on sustained higher prices have repeatedly been burned, in part because Trump’s repeated claims that the war is nearly over keep pulling prices back down, weakening the very market signal that might build resilience.
In short, we are not out of the woods yet, and we have no functional market mechanism for knowing how far from the edge we actually are.
Markets are not states. But the underlying logic is reminiscent of the Cold War paradox: Belief in the existence of an ultimate ceiling on escalation can make behavior below that ceiling more aggressive.
An oil crisis cascading into global economic catastrophe created by this war therefore remains entirely possible. Despite U.S. military efforts to increase oil shipments through the strait, world markets remain millions of barrels short of their prewar production levels. Inflation is creeping back up, while refinery attacks in the Russia-Ukraine war are adding further pressure to the price of oil and gas products from jet fuel to propane. The administration is betting that its economic pressure on Tehran will bear fruit before its own pigeons come home to roost. It may be right. But no one really knows.
That uncertainty should also shape how we think about future conflicts. In a globalized world, economics and war are increasingly inseparable. The most likely flash point for a future conflict between the United States and China, a war over Taiwan, would also be an economic war that could cost the global economy $10 trillion by some estimates.
The old stability-instability paradox was dangerous because confidence about avoiding catastrophe could itself encourage the behavior that made catastrophe possible. We may now be watching a new version develop in real time.
Global energy markets’ resilience so far has prevented this war from becoming an economic catastrophe, but that success is no guarantee the threshold won’t be crossed.
It may instead bring us much closer to the brink.
