March 30, 2026

The US is reported to be engaged in negotiations with the Iranian authorities. The US position is simple, freedom of navigation across the strait. In contrast the Iranians are demanding sovereignty over the strait. A deal that grants the sovereignty to the Iranians will effectively give Iran the ability to control the oil flows through the strait of Hormuz. and influence the world oil markets to their benefit. In effect it would grant a great degree of market influence or monopoly power. One solution to this problem is simple and direct, have Iran open the strait and establish freedom of navigation through the strait. In contrast, an Iranian complete control of the strait of Hormuz could heighten tensions in the Persian Gulf, raising the risk of disruptions to shipping routes and energy supplies. Even the perception of increased risk could drive volatility in global markets. If Iran controls the strait, its neighbors will have a strong incentive to develop alternative oil delivery routes by building pipelines that bypass the strait. The rest of the world can also help by removing barriers to produce and transport energy produced by fossil fuels and nuclear power . Policies that increase the global supply which lead to an eventual reduction in prices while the increased supply elasticity reduces the market power of the oil producers. Unfortunately, adjustment costs and the gradual reduction of regulations lead to gradual adjustment. According to the Futures markets, oil prices are note expect to return to their pre-war level before the fall of 2026. The reopening of the strait of Hormuz will also have the additional benefit of reducing the revenues that the Iranians may generate in the form of direct and or indirect tolls to be collected at the strait. But the oil market is only one of the US objectives, forcing Iran to abandon its nuclear ambitions is the more important and trickier objective to accomplish. The last several decades have shown that Iran has cheated and lied about its nuclear program and absent regime change or a total military victory, there is no reason to expect any change in behavior going forward. Absent a regime change , we expect Iran to continue its quest in a clandestine way. It will follow the North Korea path; Iran will take what the West gives. It will then lie , cheat, and pursue its nuclear ambitions. This leads us to conclude that it will be a mistake to leave the regime in power. A nuclear Iran would embolden Iran’s regional strategy. Tehran could feel more insulated from external military pressure, giving it greater freedom to support proxy groups in Lebanon, Syria, Iraq, and Yemen. This would intensify existing conflicts and complicate efforts to stabilize the region.

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