War on Iran: Energy Shock and Global Order

Introduction

Iran entered 2026 confronting a convergence of crises unprecedented since the consolidation of the Islamic Republic after the 1979 revolution. Large-scale domestic unrest, intensifying international isolation, and renewed military pressure from Israel and the United States have transformed Iran from a persistent regional challenger into a focal point of global strategic risk. The protests that erupted on 28 December 2025, initially triggered by economic collapse, rapidly evolved into the most sustained nationwide uprising in years. Simultaneously, the military balance established after the June 2025 Israeli–U.S. strikes on Iranian nuclear and missile infrastructure has proven fragile, with both sides signaling readiness for renewed confrontation.

This report argues that a renewed U.S.–Israeli strike would not simply represent another episode in the long conflict between Iran and its adversaries. Instead, it would interact with Iran’s internal crisis to reshape regional power dynamics, accelerate nuclear opacity, and impose substantial costs on global energy markets and the wider world economy. The intersection of repression at home and coercion from abroad produces a volatile strategic environment in which miscalculation carries systemic consequences.

Domestic Crisis and the Political Economy of Protest

The December 2025 protests were rooted in structural economic decline rather than isolated political grievances. Inflation exceeded 40 percent, food prices rose faster than wages, and the Iranian rial reached record lows against the dollar. Youth unemployment remained above 20 percent, while electricity and water shortages became chronic in urban and rural areas alike. Energy scarcity had become so acute that President Masoud Pezeshkian publicly floated the idea of relocating the capital from Tehran due to water stress and power failures.

What distinguished the 2025–26 protests from earlier cycles was the breadth of participation. Demonstrations initially led by shopkeepers expanded to include students, industrial workers, and minority communities in Kurdish and Baluchi regions. According to open-source monitoring by the Institute for the Study of War, protest activity peaked between 7 and 8 January 2026 across much of Iran’s territory, including Tehran, Mashhad, Isfahan, Shiraz, and Ahvaz. This geographic spread suggested that grievances were national rather than sectional.

The state response was markedly harsher than in previous protest waves. A nationwide internet shutdown imposed on 8 January curtailed information flows and coincided with intensified repression. Norway-based Iran Human Rights recorded at least 3,428 deaths by mid-January, while the Human Rights Activists News Agency placed the figure at 3,919, with approximately 25,000 arrests. Supreme Leader Ali Khamenei acknowledged “several thousand” deaths, an implicit confirmation of the scale of violence. Independent estimates citing medical sources suggested fatalities could exceed 10,000, although verification remains impossible due to the communications blackout.

The regime’s actions indicate that it no longer views protest as a manageable political problem but as a security threat to be eliminated through force. The designation of demonstrators as “terrorists” and the rapid judicial processing of detainees underscore a shift from containment to deterrence through fear. This approach has restored surface stability but at the cost of legitimacy. Political authority now rests almost entirely on the coercive apparatus of the Islamic Revolutionary Guard Corps (IRGC), the Basij militia, and intelligence services.

This reliance on repression masks elite unease. Succession debates surrounding the 86-year-old Khamenei have intensified, and divisions persist between those advocating limited economic reform and those committed to ideological rigidity. Yet there have been no verified defections within the security forces. As long as the IRGC remains cohesive, regime survival is probable, but the social contract has fractured. Iran’s leadership governs a population that increasingly views the state as predatory rather than protective.

Strategic Context After the June 2025 War

The June 2025 conflict between Israel and Iran, in which the United States intervened with deep-penetration strikes, altered regional deterrence. Israeli attacks targeted missile bases, nuclear facilities, senior IRGC officers, and nuclear scientists. U.S. strikes reportedly used massive ordnance to destroy underground enrichment infrastructure. The conflict killed nearly 700 Iranian civilians and 25 Israelis.

From Israel’s perspective, the war demonstrated its ability to penetrate Iranian air defenses and intelligence networks. From Tehran’s perspective, survival itself constituted victory. Iran retained the capacity to strike Israel, forcing millions into shelters and inflicting unprecedented damage on residential areas. More importantly, Iran’s nuclear program was degraded but not eliminated. International inspectors have not regained access to key sites, and more than 400 kilograms of highly enriched uranium remain unaccounted for.

The outcome produced a paradoxical deterrence environment. Israel interprets the war as proof that preemptive strikes work; Iran interprets it as proof that endurance works. This dual lesson encourages escalation. Israel’s “mowing the lawn” doctrine of periodic strikes is reinforced, while Iran’s incentive shifts toward opacity and dispersal rather than compliance.

Military Signaling and the Risk of Escalation

In early 2026, U.S. force posture in the Middle East expanded to levels comparable to mid-2025. Aircraft carriers, refueling aircraft, and ISR platforms redeployed to the Gulf and eastern Mediterranean. Reports indicated that at least 482 aircraft, including more than 400 combat planes, were positioned across CENTCOM and EUCOM areas of responsibility. President Donald Trump publicly referred to an “armada” approaching Iran and warned that intervention remained an option if repression continued.

Iran responded by closing airspace temporarily, moving senior leadership to secure facilities, and issuing warnings that U.S. bases in Qatar, Bahrain, and Iraq would be legitimate targets. The IRGC emphasized its ballistic missile arsenal and asymmetric naval capabilities. Tehran also increased security budgets, raising combined allocations for the IRGC, intelligence services, judiciary, and police from approximately $6.9 billion to $8.2 billion.

These actions constitute a classical security dilemma. Each side’s deterrent posture is interpreted by the other as preparation for attack. Communication channels remain nominally open, but the political environment is increasingly hostile to compromise. Statements from U.S. officials frame military options as leverage, while Iranian rhetoric frames resistance as survival. The probability of misinterpretation or unintended escalation rises as deployments intensify.

Energy Markets and the Global Economy

A renewed U.S.–Israeli strike on Iran would reverberate through global energy markets. Iran produces approximately 3.2 million barrels of oil per day and exports between 1.3 and 1.6 million barrels, primarily to China. More consequential than Iranian production itself is the Strait of Hormuz, through which roughly 21 million barrels of oil transit daily, representing about one-fifth of global consumption and nearly one-third of seaborne oil trade.

During the June 2025 conflict, tanker movements through the Gulf declined sharply, and Brent crude briefly exceeded $100 per barrel. Even limited strikes would likely trigger a risk premium similar to the aftermath of the 2019 Abqaiq attack, when prices rose nearly 15 percent in a single day. A prolonged conflict could push prices significantly higher, potentially above $120 per barrel, depending on the scale of disruption.

For Europe, which remains vulnerable after reducing dependence on Russian gas, a Gulf crisis would undermine diversification strategies. Higher oil prices would translate into higher LNG prices, as gas markets remain indexed to oil in several long-term contracts. Import costs would rise for energy-intensive industries, deepening recessionary pressures. For emerging markets, particularly in South Asia and Africa, higher energy prices would strain fiscal balances and exacerbate food insecurity, as fertilizer and transport costs increase.

Shipping insurance premiums in the Gulf and Red Sea would rise sharply. The Red Sea corridor already faces Houthi attacks linked to Iran. An escalation could divert trade around the Cape of Good Hope, increasing transit times and costs for Europe–Asia trade by up to 40 percent. The Suez Canal, which handles approximately 12 percent of global trade, would suffer revenue losses, further destabilizing Egypt’s economy.

Financial markets would likely respond with capital flight from emerging economies, rising gold prices, and increased volatility in currencies tied to energy imports. China, as Iran’s largest oil customer, would face a strategic dilemma between securing supplies and avoiding secondary sanctions. This would further complicate U.S.–China relations and deepen fragmentation of global trade.

Nuclear Nonproliferation and Strategic Stability

Military strikes would not resolve uncertainties surrounding Iran’s nuclear program. On the contrary, they would incentivize concealment. Without inspectors on the ground, verification would be impossible. Historical precedent suggests that states subjected to attack rarely abandon sensitive programs; instead, they disperse and harden them.

Iran’s current position is ambiguous. Enrichment appears halted at some sites, but the fate of stockpiles and expertise remains unknown. A strike that fails to secure fissile material would increase the probability that Iran emerges as a latent nuclear state outside institutional oversight. This would undermine the global nonproliferation regime and encourage regional hedging behavior by Saudi Arabia, Turkey, and Egypt.

Political Effects Inside Iran

Externally imposed military pressure would likely consolidate hardline control. Nationalism would overshadow reformist narratives, and opposition groups, already fragmented, would struggle to coordinate. Reza Pahlavi’s symbolic leadership resonates abroad but lacks organizational depth inside Iran. Progressive networks rooted in labor unions and civil society remain suppressed.

Historical experience suggests that war environments empower security institutions. The IRGC, already dominant economically and politically, would expand its role further. This would reduce the likelihood of negotiated political reform and entrench militarization of governance.

At the same time, repression alone cannot resolve Iran’s economic crisis. Subsidy reforms and limited stipends, such as the proposed $7 monthly payment announced in January 2026, are insufficient to offset inflation and unemployment. The regime thus faces a dilemma: repression secures short-term control but deepens long-term instability.

Regional Dynamics and Proxy Conflict

Iran’s regional network has been weakened since 2023. Hezbollah suffered severe losses, and Syrian infrastructure remains degraded. The Houthis, however, retain significant capacity and have demonstrated the ability to disrupt Red Sea shipping. A strike on Iran would almost certainly provoke retaliation through these proxies, expanding the conflict geographically.

Such retaliation would not only target Israel but also U.S. and allied interests across the Gulf. This would draw in regional states that currently seek neutrality, including Oman, Qatar, and Turkey, and could destabilize Iraq and Lebanon further.

Conclusion

Iran’s crisis is no longer solely an internal matter or a regional dispute. It has become a node of systemic risk linking domestic repression, nuclear ambiguity, and global energy security. A U.S.–Israeli strike would degrade certain military capabilities but would not resolve Iran’s political economy or strategic identity. Instead, it would likely entrench authoritarianism, fragment nonproliferation efforts, and destabilize energy markets at a time of fragile global recovery.

The central danger lies not in one decisive war but in a cycle of episodic strikes, retaliation, and repression that locks Iran, the Middle East, and the global economy into chronic volatility. The strategic question is not whether pressure should be applied but whether it is being applied in a way that produces stability rather than compounding disorder. At present, the trajectory points toward the latter.

Iran stands at a strategic breaking point. How external actors respond will shape not only the country’s future but also the structure of regional order and the resilience of the global economy in the years ahead.