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A “tit for tat” conflict between Iran and the U.S.

What happened?

The U.S and Iran have triggered global uncertainty in recent months. Stock prices and oil prices have repeatedly been affected by violent incidents. A few months ago, an Iranian-supported drone attack on Saudi-Arabian oil facilities drove oil prices nearly 20% higher, whereas the U.S. assassiniation of Qassem Soleimani hit stock markets and oil prices too. as investors are spooked, many fear a war between the U.S. and Iran. However, this fear is based on wrongful assumptions about what drives conflict between these two countries.

What does this mean?

The U.S. and Iran are locked into a “tit for tat” conflict because both countries want to avoid a war at all costs. Most importantly, because they both know that the other does not want war, they can afford to escalate situations. Indeed, Iran cannot afford another conflict in its immediate region. The Iranian economy is weak and Iran has to focus on internal development as protests threaten the regime. In fact, Iran has been locked into conflicts since the Iranian Revolution of 1979 and a war with the largest military in the world is the last thing the Iranian regime could want. Meanwhile, the U.S is no longer dependent on energy from the Middle East and a war with one of the region’s strongest militaries is therefore a huge strategic mistake.

What’s next?

The conflict between the U.S. and Iran may spook investors, but it has created an illusion of uncertainty. Although it is likely that there will be more violent incidents, there will not be a conflict between the U.S. and Iran that destabilizes markets in the long term. Indeed, after recent violent incidents, stock and oil prices quickly bounced back every time.