How might the conflict in the Gulf unfold?
In the run-up to the first Gulf War, with images of desperate South Vietnamese mobbing the US embassy for the last chopper out of Saigon still fresh in the US collective consciousness, the Powell Doctrine was drawn up. This military doctrine, named after General Colin Powell, argued that the US should only commit military force when vital national interests were at stake, and only with overwhelming force and clear objectives to ensure a swift, decisive victory. Conceived after the quagmire of the Vietnam War, and a failed intervention in the Lebanon, each drawing American troops into unwinnable conflicts, the Powell Doctrine dictated that before any military engagement could be entered, there had to be an exit strategy. If there were a Powell Doctrine textbook, Operation Desert Storm, which successfully reversed Iraq’s invasion of Kuwait in 1991, would be on page one.
Fast-forward 35 years and the Trump administration has forgotten to do its history homework. Operation “Epic Fury,” the joint US–Israeli military campaign launched against Iran at the weekend, has sparked an unwelcome period of uncertainty, not just for the security of the Gulf states, but for global markets too, all without a clearly planned route to the finish. Initial airstrikes were successful in killing Iranian Supreme Leader Ayatollah Ali Khamenei, as well as half a dozen senior Iranian military and intelligence officials. However, with no clearly achievable end goal, have the US and Israel cut the head off a snake or will it grow back like a Hydra?
A Telegraphed Campaign
Epic Fury was not a surprise. The US military build-up in the region had been visible for weeks. It appears allies were consulted, even if they did not buy into military action. The UK initially refused to let the US use its regional bases, which now gives some context to President Trump’s recent critical comments on the UK’s handling of the Chagos Islands.
The US has military bases peppered throughout the Gulf, and the Gulf States were almost certainly briefed, especially as they had two carrier strike groups, the USS Abraham Lincoln and the USS Gerald R. Ford, off their coasts. The warning signs were there, although of course the exact timing of the attack, and how it might unfold in this fast-moving situation, were, and are, unknowable.
Iran’s Retaliation and the Gulf
Tehran’s response was to hit American bases and other strategic targets in the Gulf, striking to cause maximum disruption rather than targeting civilian centres. The Dubai port of Jebel Ali, the busiest commercial port in the region, was hit. The port handles roughly 15 million containers annually, a natural target to impact global supply chains. QatarEnergy, which produces roughly one-fifth of the world’s liquefied natural gas (LNG), ceased operations following attacks on operating facilities. Little surprise that shipping operators do not want to run the gauntlet through the Strait of Hormuz, through which some 15–20% of daily global oil supply flows. Traffic has plunged by around 70% since the weekend, with many shipping companies suspending operations there. Trump has offered US Navy protection for passing ships, but this may take time to implement. Targeting airports also ensured that airspace in the region was closed, contributing to the disruption.
The Iranian logic is clear: if it cannot fight US airpower directly, it can apply pressure by causing widespread disruption and economic damage to the region and beyond, hoping that the US will cease operations in the wake of global chaos.
Not only this, but Iran is seeking to alienate the Gulf states from the US and Israel. The Gulf states have been safe havens for some years now, creating a pro-business environment and attracting economic migrants with the promise of security, prosperity and affluence. In this respect, the Gulf states are the very antithesis of the Iranian regime.
The likes of the UAE, Qatar and Bahrain have worked hard to cultivate this image and will be privately imploring the US to help them maintain it – Iran recognises this and has selected the targets for its drone and missile attacks to cause maximum disruption and chaos, while stopping short of targeting civilian centres. The blaze next to the iconic, seven-star Burj Al Arab hotel in Dubai was caused by shrapnel from a downed drone, rather than any attempt to target civilians directly, but it plays into Iran’s desire for chaos.
Though they hope to drive a wedge between the US and the Gulf states, Iran may succeed in doing the opposite, especially if, like at the Burj Al Arab, civilians are endangered. While Iran has been successful in disrupting the Gulf states’ economies and sending shockwaves around the world, its attacks could be an “own goal”. The Gulf states will close ranks behind the surprise American action to protect their citizens and infrastructure. Iran could find itself more alienated than before.
The UK has done little but sit on the fence up to now, even in the face of strikes on the RAF base in Cyprus. Keir Starmer’s actions have hardly been those befitting of a US ally, though he is warming to the US effort now, albeit only after significant political pressure. Trump jibed that it is ‘not Winston Churchill that we’re dealing with’, though perhaps Starmer is an easier bedfellow – Churchill once quipped that “Americans can always be trusted to do the right thing, once all other possibilities have been exhausted.”
Financial Market Reaction
Markets reacted with controlled alarm, initially bordering on “meh” rather than panic. The S&P 500 initially lost 1.1%, and the Nasdaq Composite fell 1.6% on Monday. The CBOE Volatility Index, or “fear index”, rose to just above its long-run average, while spot gold was up about 2%. However, stocks have extended their losses early this week, particularly in Europe. There is little doubt that energy is the market’s main concern, especially oil and natural gas. Crude has surpassed $80 per barrel, a sharp rise but still some way off the levels seen in Autumn 2023 when Saudi Arabia and Russia extended their voluntary production cuts.
Brent Crude Oli:
Source: Hargreaves Lansdown
Oil prices are certainly elevated, and LNG supply is also causing concern as prices have jumped considerably following the QatarEnergy shutdown. Despite LNG making up a less than 10% of global consumption, it is an important source at the margin, and thus influences prices significantly. LNG from Qatar makes up a comparatively small portion of the UK’s gas imports, less than 2% according to 2024 figures, but the supply shock could still impact energy prices for households.
In the face of surging energy prices, the market is digesting the threat of sustained inflation across the world. The Bank of England may have to reconsider the merits of a rate cut this month, which was all but certain until the conflict broke out at the weekend.
US War Aims: Regime Change Without Boots on the Ground
The stated US objective for Epic Fury is vague and arguably ignores the Powell Doctrine. On social media, Trump has said the bombing will continue “as long as necessary to achieve our objective of PEACE THROUGHOUT THE MIDDLE EAST,” while also signalling openness to lifting sanctions if pragmatic new Iranian leadership emerges. However, it is difficult to see how things can change that much without boots on the ground.
Maybe just change at the top will suffice, as it did in Venezuela recently, but if that is the case, the bombing should have ceased already. If it is regime change Trump is after, his plea to the Iranian people to take control of their country is far-fetched at best, with no viable political alternative strong enough to make such a move. The Islamic Republic in Iran likely regards this conflict as existential and may fight until the bitter end.
For investors, uncertainty is the core risk. A swift collapse of the Iranian government could unlock energy markets and open investment opportunities; a prolonged conflict that keeps the Strait of Hormuz contested and disrupts global supply chains would sustain elevated oil prices, depress global growth and keep equity and bond markets under pressure. Markets so far have not panicked, but a period of heightened uncertainty could be damaging.
In short, markets can tolerate shock, but they struggle with drift. Few would argue with the goal of regime change in Iran, but without a clearly defined endgame, Trump is at risk of trading a swift show of force for a prolonged period of instability.
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