US-Israel War on Iran: Will a Ceasefire Prevail Amidst Economic Concerns?

The question of whether the US and Israel’s conflict with Iran will soon conclude is paramount to understanding its potential economic ramifications. This hinges on whether Donald Trump’s past tendency to avoid full-scale conflict – dubbed the “Taco” theory by analyst Robert Armstrong – will apply here, and whether a resolution for Trump aligns with the objectives of Iran and Israel, both of whom view the struggle as existential.

Uncertainty Surrounding Trump’s Objectives

The ambiguity surrounding Trump’s intentions complicates predictions. While he stated on Monday, February 24, 2026, that the war would be over “very soon” but not that week, a Truth Social post two days prior demanded “UNCONDITIONAL SURRENDER!” from Iran, followed by the installation of a “GREAT & ACCEPTABLE Leader(s)” before the US and its allies would work to stabilize the region. Analysts suggest a divergence between Trump’s and Israel’s war goals.

Iran’s Resolve and Regional Threats

Iran’s Islamic Revolutionary Guard Corps (IRGC) asserted its determination to dictate the war’s end, vowing to halt all oil exports from the region if US and Israeli attacks persisted. The appointment of Mojtaba Khamenei, following family losses, underscores this unwavering stance. Iran appears to be pursuing victory rather than unconditional surrender, a scenario unlikely to be achieved through conventional means. Some speculate about the potential, though unlikely, consideration of nuclear weapons by Trump.

A Ceasefire as the Most Plausible Outcome

A cessation of hostilities appears more probable. The US might deem sufficient damage inflicted and halt attacks, while a battered Iran could cease targeting its neighbors. Trump might compel Israel to stop its attacks even if the Iranian regime remains in power. This would not represent peace, but a potentially temporary ceasefire, largely driven by concerns over oil prices.

Potential Economic Impacts: Scenarios and Estimates

The economic consequences depend on the duration of conflict and the extent of damage to oil and gas infrastructure. Capital Economics has outlined three scenarios:

• Short, Sharp Conflict (2 weeks): A loss of approximately 1.4% of global annual oil exports and a similar proportion of LNG exports.
• Three-Month Conflict (Limited Damage): A loss of 5-6% of world exports of crude and LNG in 2026.
• Three-Month Conflict (Long-Lasting Damage): A loss of 8-9% of world exports of oil and LNG, potentially impacting 2027, with oil prices reaching $150 a barrel and EU gas prices hitting €120 per megawatt hour.

The last scenario is comparable to the global supply shock experienced from the late 1970s to the mid-1980s.

Broader Economic Considerations

A prolonged and destructive war would significantly impact price levels and economic activity, particularly in poorer countries. Even in Western nations, where affordability is a political concern, a surge in energy costs would be unpopular and could hinder growth. However, economists like Paul Krugman suggest the economic damage would likely be less severe than the shocks of the 1970s, due to reduced oil intensity in modern economies and improved central bank management of inflation expectations.

Key Economic Lessons

• Reduce Fossil Fuel Vulnerability: Investing in renewable energy sources is crucial to mitigate the impact of supply disruptions.
• Anchor Inflation Expectations: Central banks must proactively address second-order effects of price increases to maintain stable inflation expectations.
• Targeted Energy Subsidies: Broad energy subsidies are unsustainable; support should be directed towards those most affected by price increases.

The Importance of De-escalation

While a ceasefire appears plausible, it is not guaranteed. The US has a history of initiating conflicts that escalate into lengthy and disastrous engagements. A cautious approach, similar to Harold Wilson’s decision to keep the UK out of the Vietnam War, is warranted.