Authors:

• Tasneem Azim-Khan, Vice President, Chief Investment Strategist
• Noha Fazili, Research Analyst

On February 28, 2026, the U.S. and Israel launched coordinated military strikes against Iran through Operations Epic Fury and Lion's Roar, precipitating a regional conflict with profound global economic implications. Oil prices have surged more than 50% year-to-date, reclaiming the $100 per barrel threshold for the first time since 2022, as Iran effectively shut down the Strait of Hormuz – a critical chokepoint accounting for nearly 20% of global oil, and natural gas shipments. Commercial vessel crossings have fallen to near-zero, with at least 20 ships attacked in the region through mid-March.

The conflict intensified following the death of Iran's Supreme Leader Ali Khamenei in an Israeli strike, with his son Mojtaba Khamenei quickly appointed as successor – marking the first hereditary transition since the 1979 Islamic Revolution. The new leadership has reinforced Iran's hawkish stance, with senior officials pledging continued military action against U.S. demands for unconditional surrender encompassing nuclear program dismantlement, reduced regional influence, and regime change. Historical precedent from Iraq and Afghanistan suggests lasting regime change remains challenging even with military occupation, particularly given Iran's deeply entrenched theocratic government and absence of organized opposition.

International support for U.S. military action has been limited. Major allies including Germany, Japan, and Australia have declined to assist in reopening the Strait of Hormuz, with Germany's Defence Minister explicitly stating, "this is not our war." Canada has offered measured support, endorsing prevention of Iranian nuclear weapons acquisition while stopping short of committing armed forces to direct participation, though remaining open to defending Gulf nations from Iranian attacks.

The economic transmission mechanisms extend beyond direct oil price impacts. Middle East disruptions affect fertilizer supply (30% of global urea transits the Strait), aluminum production (20% originates regionally), and natural gas prices, which have doubled in Europe, and Asia. Secondary effects include higher costs for plastics, chemicals, pharmaceuticals, air travel, and trucking, disproportionately burdening lower-income households, and exacerbating affordability crises. RBC Economics estimates that sustained WTI prices around $100 per barrel could push U.S. inflation above 3% year-over-year, complicating Federal Reserve policy decisions as stagflationary pressures build.

Mitigating factors include coordinated strategic petroleum reserve releases of 400 million barrels across 32 nations, Saudi Arabia's Red Sea pipeline capacity (4-6 million barrels per day spare capacity), UAE's Gulf of Oman bypass, and China's substantial reserves. These offsets could reduce the effective supply shortfall from a theoretical 20 million barrels per day to approximately 5.5 million barrels per day.

Historical analysis of geopolitical shocks suggests markets tend to produce short-lived reactions, with median S&P 500 Index declines of roughly 3% during initial reaction periods. The recommendation remains maintaining portfolio diversification across geographies and asset classes, avoiding panic selling, and remaining invested through periods of distress to facilitate long-term return compounding.

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