Three paths forward on Iran

Events in the Middle East continue to weigh on the region and the global economy. The approach of the Trump administration has shifted between pursuing renewed negotiations and launching further military action, largely against military facilities. Tehran, meanwhile, appears to be holding firm, having secured continued control of the country, regime survival, the release of $25 billion in frozen assets, and a proposed $300 billion development and reparations fund as part of the initial ceasefire agreement. Iran has thus far shown little willingness to move on Trump's two central objectives: reopening the Strait of Hormuz and stepping back from its nuclear weapons program.

Militarily, Iran has lost roughly 65% of its combat power: a significant degradation, but hardly a knock-out blow. Its two principal proxies, Hezbollah and Hamas, have been degraded even further. Iran nonetheless retains enough capability — ballistic missiles, drones, small naval craft, and mines — to threaten merchant shipping and Gulf Arab oil and gas infrastructure. A third key proxy, the Houthis, are increasing their blockading activity in the Red Sea and the Bab-el-Mandeb Strait to the west. Overall, Iran has been significantly weakened but continues to pose substantial regional security risks.

The United States and Israel have depleted a significant number of air defense interceptors, long-range cruise missiles, and precision-guided munitions. However, substantial combat power remains. There are nearly 60,000 US troops in the region, two full-capability nuclear aircraft carrier strike groups, dozens of additional sophisticated AEGIS and amphibious warships, and hundreds of Air Force combat aircraft across regional US bases and at sea. While recent US military casualties have contributed to domestic debate over continued involvement, with several polls showing a plurality of Americans against continued involvement, they have not materially affected US operational capability.

The Trump administration effectively has three options, each of which carries significant strategic tradeoffs.

The first is to significantly reduce the US military presence and shift toward regional burden-sharing. This would be welcomed not only in Tehran, but in Moscow and Beijing, whose regional influence would rise as a result. It would also unsettle both Israel and Arab allies and would leave Iran with a stranglehold over the Strait and, by extension, global energy and fertilizer markets. I suspect that President Trump knows this is not a realistic option, though it may be raised periodically to encourage European and Arab participation in strait-clearing operations. We put the likelihood of this outcome at roughly 10%.

The second is to significantly escalate military operations, extending US and Israeli strikes to Iranian economic targets — oil, gas, transportation, refining and storage facilities — at a pace of 300 to 500-plus targets per 24-hour cycle. This would be a dramatic move and clearly has been presented to Trump on several occasions, as he has talked about it but has not acted upon it.

The problem with this option is twofold. It is very expensive, both in terms of ordnance, fuel, and casualties, while also drawing the US military ever more deeply into major combat. It would likely require an initial deployment of roughly 30,000 ground troops to secure the Strait and perhaps Kharg Island (however I believe a naval blockade would be more effective for the latter). It would also likely provoke an all-out Iranian response against Gulf Arab oil and gas, terrorist attacks both regionally and globally, and potentially pull Russia and China more deeply into support for Iran. We view this as a lower-probability but rising-risk scenario, particularly if Iran overplays its hand, at roughly 30%.

The third, and most likely path is renewed negotiations, backed by measured US military pressure to incentivize Iran back to the table. As of August 3, Trump announced he is “holding off on a big strike” because “everyone in the region” is “begging for talks.”

I believe the administration is likely to continue using the naval blockade of Iranian ports by the US Navy’s Fifth Fleet to pressurize Tehran, increase the use of cyber (especially in response to presumed Iranian forays against the US water infrastructure), and perhaps amp up covert operations in conjunction with Mossad and CIA. President Trump may also attempt further decapitation against the recalcitrant elements in Tehran (mostly but not entirely limited to the Iranian Revolutionary Guards). We view this as the most likely path forward, at roughly 60%.

So, what happens?

In the 60% scenario above, the most likely outcome is an agreement to reopen the strait, probably with a dual-key structure where Iran controls northbound transit and Oman controls the southbound route. While not ideal from the perspective of new bureaucracies, potential fees, and issues under international law, it would be a face-saving outcome. A shaky ceasefire could resume, and the postponed nuclear talks perhaps resume. All this could play out over the next couple of months.

Unfortunately, there remains a 30-40% chance of a darker outcome, either a US withdrawal or an all-out resumption of hostilities, which would likely increase uncertainty across the region and global energy markets.

It’s worth noting that Iranian control of the Strait of Hormuz is a depreciating asset for Tehran, meaning the global energy system is moving quickly to adapt and avoid a future chokehold. This process will take several years, of course, and the current volatility is likely to continue even if a new ceasefire is reached.