According to the Greek parable told by Cicero, Damocles was a flattering courtier in the court of Dionysius II of Syracuse. He constantly praised the king, saying how wonderful it must be to rule—surrounded by luxury, power, and pleasure.
Tired of the flattery, Dionysius let Damocles sit on the royal throne for a day and enjoy every luxury. But he hung a sharp sword directly above his head, suspended by a single horsehair. Damocles quickly begged to leave, realizing that a king’s life is filled with anxiety and peril despite its outward glory.
This parable feels especially relevant today as the war with Iran enters its third month.
Peace talks have flickered on and off, largely because no one seems to know who is truly in charge in Iran. After the US and Israel eliminated much of the top government leadership, the country’s 31 provinces have been left to make independent decisions on how to continue the fight. This power vacuum leaves investors with three potential paths to end the conflict.
First, the US could wait for the provinces to sort out leadership — ideally a new figure acceptable to the IRGC. This would be the best-case scenario: a peace deal, falling oil and commodity prices, and rising asset prices. Unfortunately, I put low odds on this outcome.
Alternatively, the US could resume bombing to pressure provincial commanders toward that same deal. Oil would likely spike and stocks would fall in the near term. I suspect Trump considered this two weeks ago but instead chose to extend the ceasefire indefinitely—presumably to give scenario one more time to develop. Recent reports suggest this option is back on the table. While I still assign it a relatively low probability, the likelihood appears to be rising. If Trump does resume strikes, the stubbornness of the IRGC will likely push events toward the base case below.
My base case is that Trump eventually declares victory and brings most troops home. A variant of this is a partial US withdrawal: the Strait of Hormuz reopens under a fragile, North Korea–style perpetual ceasefire while heavy sanctions remain. Because this is my working assumption (subject to change with events on the ground), it’s worth walking through the longer-term consequences:
Nuclear Weapons
North Korea’s nuclear shield protected it from invasion. Iran will almost certainly pursue the same deterrent with renewed urgency. This also raises the risk of proliferation — Saudi Arabia? Others? Would Russia have invaded Ukraine if Kyiv had the bomb?
Defense Spending
As I’ve written before, cheap drone warfare is upending traditional military economics. The US Navy has struggled to secure the Strait against low-cost air and sea drones. In a world where commodity disruptions carry immediate political weight (i.e., inflation), governments may finally rethink pouring capital into expensive platforms in favor of asymmetric defenses.
Tolls and Saudi Choices
A US exit would likely leave Iran in de facto control of the Strait, charging tolls. Gulf exporters (UAE, Kuwait, Qatar, Bahrain) would then face higher costs — either paying Iran directly or routing more volume through Saudi Arabia’s East-West pipeline (for a fee).
The Saudis have an interesting decision: maximize output and pay the toll on roughly 3 million barrels per day through the Strait, or limit exports to pipeline capacity (~7 million bpd total, much of it already committed) and accept lower overall volumes. The latter would keep oil prices extremely elevated — potentially $150+ — but protect Saudi revenue without enriching Iran. Their biggest customers (China, Europe, and the US) would not be happy, but Riyadh might not care.
US Economy
Fortunately, America is a net energy exporter with abundant oil and gas. As long as oil stays below extreme levels (say $150), consumers can likely absorb the hit. Interest rates will be the key variable — if they don’t spike dramatically, the US should avoid recession. High-end consumers, who have proven remarkably resilient through previous shocks, should continue carrying much of the economy, while surging AI capital expenditures from the technology sector provide a powerful and timely offset to any energy-related weakness. With still-solid returns on invested capital, the United States has a meaningful cushion most other nations lack.
Ultimately, time is the sword hanging over Damocles — and over global markets. The longer the Strait of Hormuz remains constrained, the greater the pressure on energy prices, inflation, interest rates, and investor confidence. Like Damocles on the throne, we sit in apparent luxury — abundant in oil and natural gas — while the threat of higher inflation and interest rates dangles by a thread.
