Iran warns of escalation as Hormuz standoff threatens 20% of oil

Iran's Supreme Leader has authorized conflict escalation if Tehran's conditions remain unmet, a top advisor said Tuesday, deepening the standoff over the Strait of Hormuz that carries 20 percent of global oil and gas.

"The current situation has proven the United States lacks the capability to protect its Persian Gulf allies," Mokhber, advisor to Supreme Leader Mojtaba Khamenei, said on social media. He proposed a "Hormuz Economic Security Mechanism" as the most durable path to a new regional order, one that would reduce dependence on US military guarantees.

Iran has imposed a blockade on the strait since the US-Israel war began in February, while Washington has countered with a naval blockade of Iranian ports. Tehran said the waterway will not reopen until the US permanently ends the war, lifts its naval blockade, withdraws its military from the area, and "completely compensates" Iran for war damage. There was no White House comment on the latest statement.

The standoff has pushed crude prices higher and raised the risk premium across energy markets. Iran's proposed mechanism would formalize Tehran's control over the waterway — a precedent that could reshape global energy trade routes and set a dangerous example for other nations controlling trade choke points.

Iran's leverage grows as US options narrow

Iranian leaders believe time is on their side. They know about the diminishing stockpiles of key US weapons such as advanced missile interceptors. They know the war is deeply unpopular with Americans. They know that as long as the strait is largely closed, the price of gas and other goods will stay high ahead of US congressional elections in November. They know their Houthi allies in Yemen could widen the war and disrupt another major trade route.

By that logic, President Donald Trump has no choice but to capitulate. But Iran's strategy carries risks. Trump points to strikes that have decimated Iran's top leadership, navy and air force. Iran's own economy has been battered, in part because of the US blockade. Iranians rose up in mass protests in December when a currency crisis triggered some of the biggest anti-government demonstrations in the 47-year history of the Islamic Republic. Authorities responded with a bloody crackdown in which thousands were killed and tens of thousands detained.

The appointment of Mohsen Rezaei, the former commander-in-chief of the Islamic Revolutionary Guard Corps, as secretary of Iran's Supreme National Security Council on Sunday shows Tehran is prioritizing military and security considerations. Rezaei, who headed the IRGC from 1981 to 1997, has placed high importance on Iran maintaining control of the strait. In July, he said control of the waterway was worth more than "dozens of atomic bombs."

Economic pain cuts both ways

The economic fallout from the war has spread worldwide but is particularly acute in Iran. US and Israeli strikes have pummeled its industrial base. The US blockade has choked off much of its oil exports. Iranians are grappling with triple-digit food inflation. Trump has repeatedly threatened major strikes on civilian infrastructure like water and electricity.

Mohammad Javad Zarif, who as foreign minister helped negotiate the 2015 nuclear deal, wrote in a recent essay that Iran's achievements in the war had opened "an exceptional window for diplomacy." But he warned that if it doesn't strike a deal soon, "economic recovery will be difficult, and the possibility of internal unrest or renewed aggression, especially after the US elections, cannot be ruled out."

Iran says it is close to reaching a deal with Oman to manage the strait, which runs between the countries. But Tehran said the strait will not open until the US "corrects its behavior." A deal with Oman would formalize Tehran's control over what had been an open international waterway before the war.

The last time a major trade chokepoint was closed for an extended period was the 1973 oil embargo, when crude prices quadrupled within months. The current standoff has already pushed global energy prices well above pre-war levels, and any further escalation could trigger another spike. For Iran, the strait has become "a strategic lever for deterrence, maintaining the regional balance of power, and reshaping the security rules in the Persian Gulf," said Mostafa Najafi, a Tehran-based security analyst.

This article is for informational purposes only and does not constitute investment advice.