{"id":32090,"date":"2026-03-27T13:26:23","date_gmt":"2026-03-27T17:26:23","guid":{"rendered":"https:\/\/www.rbcwealthmanagement.com\/en-ca\/?p=32090"},"modified":"2026-04-09T14:02:12","modified_gmt":"2026-04-09T18:02:12","slug":"the-escalation-trap-the-iran-war-in-context","status":"publish","type":"post","link":"https:\/\/www.rbcwealthmanagement.com\/en-ca\/insights\/the-escalation-trap-the-iran-war-in-context","title":{"rendered":"The escalation trap: The Iran War in context"},"content":{"rendered":"\n

By Tasneem Azim-Khan<\/a>, Vice President and Chief Investment Strategist and Noha Fazili, Research Analyst<\/strong><\/p>\n\n\n\n

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The following commentary is for the purposes of providing context and perspective around the recent flare up in hostilities  in the Middle East. The commentary is not intended to be political, nor should it take away from human tragedy related to these events.<\/em><\/p>\n<\/div>\n\n\n\n

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With oil prices reclaiming the $100 per barrel level for the first time since 2022, and up more than 50 percent year-to-date, the market is still grappling with the increasingly uncertain endgame for the Iran conflict. Questions abound as to how long military actions will persist across the Gulf region, what this implies for energy markets and the magnitude of the global second order economic impacts. The answer to these questions will largely depend on the duration and degree of disruption permeating from this conflict.<\/p>\n\n\n\n

The following discussion aims to provide background and context to the conflict. However, we acknowledge an exceptionally volatile backdrop with the narrative shifting on a day-to-day basis. By the time you read this, the world could look different. To wit, right before this article went to press, brent crude prices were receding from highs set in late March as news emerged of President Donald Trump\u2019s 15-point peace plan for Iran (which has since been rejected by Iran\u2019s government). <\/p>\n\n\n\n

Fortunately, markets historically tend to look past geopolitical crises\u2014not always, but they tend to. As unnerving as such periods as today can be, we prefer to prepare for such scenarios rather than predict them. We believe maintaining healthy levels of diversification across geographies, asset classes (equities, fixed income and<\/em> alternatives), and a bias toward quality and defensive posturing, are key. The avoidance of panic selling, opportunistically taking advantage of air pockets in the market and remaining invested through periods of distress enhances portfolio efficiency and facilitates the compounding of returns over the long term.<\/p>\n\n\n\n

Military strikes were always on the cards<\/strong>\u2014the rapid pace of retaliation and escalation perhaps was not<\/strong><\/h2>\n\n\n\n

On Feb. 28, 2026, the U.S. and Israel launched Operation Epic Fury and Operation Lion\u2019s Roar, respectively, a series of coordinated attacks on Iran. This laid to rest several months\u2019 worth of speculation about potential military action against Iran, but has also seemingly opened a Pandora\u2019s Box, with currently no clear off-ramp to the geopolitical conflagration across the Middle East at the time of writing.<\/p>\n\n\n\n

Viewing the attacks as an existential threat, Iran has responded aggressively. In addition to targeting Israel and regional U.S. bases, Iran has also struck energy and civilian infrastructure across neighbouring Gulf states. Most critically, in March it effectively shut down the strategic Strait of Hormuz to shipping\u2014a critical energy chokepoint for the global economy that alone accounts for nearly 20 percent of the world\u2019s oil and natural gas shipments. Since then at least 20 commercial vessels <\/a> have been attacked off the coast of Iran.<\/p>\n\n\n\n

Ship crossings in Strait of Hormuz come to a near halt<\/h3>\n\n\n\n
\"Ship<\/figure>\n\n\n\n

Cascade of interference<\/strong><\/h2>\n\n\n\n

Within less than 24 hours of the military operation beginning, Iran\u2019s Supreme Leader Ali Khamenei was killed in an Israeli \u201cdecapitation\u201d strike. Yet the leadership vacuum in the country was fleeting. In early March, Iran’s Assembly of Experts selected Mojtaba Khamenei, the second child and son of Ali Khamenei, to become the third and new Supreme Leader of Iran.  <\/p>\n\n\n\n

This marks the first time since the 1979 Islamic Revolution that Iran’s Supreme Leader has passed from father to son\u2014an unusual development for a state founded explicitly to overthrow the hereditary rule of the country\u2019s previous leader, the Shah Mohammad Reza Pahlavi. Yet Mojtaba Khamenei, who is 56, has earned a reputation as a powerful figure behind the scenes of his father\u2019s decades-long tenure at the top of the country\u2019s ruling structure. This has seemingly strengthened the resolve and influence of the hawkish wing of the Iranian regime against the U.S. To wit, a slew of senior officials have vowed to continue fighting the expanding war, which has now persisted for more than three weeks.<\/p>\n\n\n\n

These pledges by senior members of Iran\u2019s government demonstrate just how far the reality divide is between the two sides of the conflict, given the Trump administration\u2019s insistence for \u201cunconditional surrender\u201d from Iran. This demand is all-encompassing and calls for a dismantling of Iran\u2019s nuclear program and missile capabilities, an undermining of the country\u2019s regional influence in the Middle East, and meaningful change in leadership.<\/p>\n\n\n\n

History would suggest regime change may remain elusive, particularly in a country such as Iran where the current theocratic (i.e., religious leadership) government is deeply entrenched, and there appears to be no truly well-organized opposition. The appointment of \u201cSon of Khamenei\u201d signals a continuation of the father\u2019s hardline approach. With strong support from ultra-conservative clerics and much of the Islamic Revolutionary Guard Corps (IRGC), his leadership could in fact fortify Iran\u2019s confrontational stance toward the West. Past examples provided by the wars in Iraq and Afghanistan underscore just how challenging lasting regime change can be, even with \u201cboots on the ground\u201d and military occupation. <\/p>\n\n\n\n

More recent signs of further escalation include President Trump\u2019s deployment to the region 2,500 U.S. marines aboard as many as three warships. These marines join more than 50,000 American troops already stationed across the region. We suspect the most likely intent behind their deployment is to support the reopening of the Strait of Hormuz, though another possibility could be the seizure of Kharg Island <\/a>\u2014an Iranian oil hub which the U.S. and Israel have already struck in the course of their military strikes.<\/p>\n\n\n\n

Further and in yet another blow to Iran\u2019s leadership, the Israeli military announced that it had killed one of Iran\u2019s highest-ranking leaders, Ali Larijani, in an airstrike near Tehran. It also said it killed Gholamreza Soleimani, the head of Basij, Iran\u2019s powerful militia and a key element of the regime\u2019s security forces that is often used to control and terrorize protestors in the country. While this could reduce the government\u2019s ability to drive forward its retaliatory attacks and maintain its control over the population, it is unlikely to cripple the regime at this juncture. According to the Wall Street Journal <\/a>, Larijani was an important figure within the regime, yet the ranks of security forces that are key to its survival run deep. The Islamic Revolutionary Guard Corps alone has extensive leadership and around 190,000 active-duty fighters <\/a>.<\/p>\n\n\n\n

The rest of the world is on standby \u2026 for now<\/strong><\/h2>\n\n\n\n

Thus far, support from U.S. allies has been limited. President Trump recently attempted to rally the international community to help reopen the Strait of Hormuz and, as such, to relieve pressure on spiking energy prices. Such attempts have been rebuffed or ignored to date, although countries such as France and Britain have begun to discuss how they might assist the Americans in securing the Strait. However, according to the Wall Street Journal <\/a>, Germany has categorically declined, with German Defence Minister Boris Pistorius stating, \u201cThis is not our war. We did not start it;\u201d while Japan and Australia indicated they are unlikely to send vessels to help.\u00a0<\/p>\n\n\n\n

Canada for its part has been sending mixed signals. Ottawa has stated that, like many other U.S. allies, it was not made aware of the planned military action by the U.S. against Iran in advance. While Prime Minister Mark Carney has been supportive of preventing Iran from acquiring nuclear weapons, he has stopped short of endorsing the war itself or committing Canadian armed forces to any direct participation. He indicated that Canada supported the U.S. strikes \u201cwith regret,\u201d casting the attacks as a consequence of an abdication of international order. Defence Minister David McGuinty was emphatic that Canada\u2019s position not to join the U.S. and Israel in their military attacks on Iran would not change. He left the door open to providing help to any Gulf nation seeking assistance in defending itself from Iranian attacks.<\/p>\n\n\n\n

Never one to be dismissed, President Trump fired back at allies that refused to join the effort to reopen the Strait, stating \u201cwe will remember.\u201d In an interview with the Financial Times <\/a>, Trump said if NATO allies refuse to help, \u201cit will be very bad for the future\u201d of the alliance.<\/p>\n\n\n\n

Oil market and energy disruption<\/strong><\/h2>\n\n\n\n

At the time of writing, Brent crude oil prices have jumped more than 50 percent on a year-to-date basis\u2014to as high as US$106 per barrel, a stark contrast to the roughly US$67 per barrel seen just a month ago. Given that oil supply and demand are both highly inelastic in the short run\u2014and typically behave as a transmission mechanism during periods of heightened geopolitical conflict\u2014the surge in oil prices is not surprising.<\/p>\n\n\n\n

Oil prices are hovering at four-year highs<\/h3>\n\n\n\n
\"Oil
Source: Bloomberg, RBC GAM. Brent crude prices as of March 17, year-to-date.<\/figcaption><\/figure>\n\n\n\n

The trajectory of energy prices going forward\u2014and the broader economic impact of sharply higher energy prices of the global economy\u2014will largely depend on the duration and severity of disruption of the conflict. <\/p>\n\n\n\n

At this stage, the timeline remains highly uncertain. Policy experts in Washington suggest that expanding U.S. war objectives alongside Iran\u2019s commitment to retaliate could propel the conflict well into the spring, particularly if the Strait of Hormuz remains inaccessible. Should such a scenario transpire, and disruptions persist for several more weeks, oil and natural gas prices could push higher still.<\/p>\n\n\n\n

We are acutely aware that crises can often go from bad to worse. In the fog of war that has unfolded over the last few weeks, RBC Global Asset Management has pointed to a number of emerging factors that are shaping the outlook on energy markets:<\/p>\n\n\n\n