The Iran war could drag into 2027, analyst warns. The economic fallout is just getting started

As the conflict reaches the four-week mark, more escalation appears to be on the way, despite Trump further pushing back his threat to attack Iranian energy infrastructure.

“The Middle East War now appears to be broadening and deepening,” Capital Alpha Partners analyst Byron Callan said in a note on Thursday. “We have 25% confidence that it’s concluded by the end of May, 45% that it’s settled in the fall of 2026, and 35% that it extends into 2027.”

The war has spread to Iraq as U.S. forces battle Iran-backed militias, and it will likely extend to Yemen, where Houthi militants aligned with Tehran are expected to threaten shipping in the Red Sea.

That would cut off a critical outlet for cargoes and for Saudi oil that has emerged as an alternative with the Strait of Hormuz still mostly blocked, giving Iran even more leverage over the global economy.

Fighting has also reached the Caspian Sea as Israel recently bombed Iranian ports suspected of receiving arms shipments from Russia.

“An escalatory spiral that emerged with strikes on non-military targets does not appear to be contained,” Callan warned.

Gas prices and inflation are under pressure

A prolonged war sets up a darker economic outlook as it’s only just starting to weigh on activity. The average price of gasoline is now $3.98 per gallon, up from $2.98 a month ago, according to AAA. That will cut into consumer spending elsewhere, which had stayed resilient even during Trump’s tariffs last year. The stock market selloff will also produce a negative wealth effect, dampening willingness to spend.

Inflation will heat up too, and was already under pressure before the war. Import prices shot up 1.3% in February, the largest month-over-month increase since March 2022, in the immediate aftermath of Russia’s invasion of Ukraine.

The prospect of worsening inflation has also sent Treasury yields higher, lifting borrowing costs throughout the economy. That includes mortgage rates, which have jumped to the highest level since October. With home ownership now even more expensive, mortgage application volume plunged 10.5% last week from the prior week.

‘Seizing Kharg Island seems a bit loopy’

While about 5,000 Marines and 3,000 soldiers are headed to the Middle East, with 10,000 more U.S. group troops reportedly under consideration, Callan is “very skeptical” that Trump can deliver a knock-out blow to Iran that will cause the regime to accept his peace terms.

Still, he expressed 75% confidence that the U.S. will put boots on the ground to seize Iranian territory and try to fully reopen the Strait of Hormuz.

Such an operation could involve an attack on Kharg Island, where 90% of Iran’s oil is exported, or other islands near the strait. But ground troops would face the risk of Iranian missiles and drones, which the U.S. has failed to prevent from inflicting extensive damage to its bases and embassies in the region.

“This could lead to a long-war scenario,” Callan predicted. “Seizing Kharg Island seems a bit loopy to us because an occupying force would probably have to deal with an extremely unpleasant environment created by the burning of oil in storage facilities. If the intent of seizing Kharg is to cut off Iranian oil exports, that could be done by simply stopping tanker traffic carrying Iranian product.”

In fact, other analysts have also called for a naval blockade of Iran’s oil exports, saying it would be more effective and less risky than deploying troops, especially given that Iran has other hubs besides Kharg from which oil can be exported.

Persian Gulf neighbors could join in

Callan sees the occupation of islands near the strait as the most likely use of U.S. troops and doesn’t expect a large-scale invasion that deep into Iran’s interior, meaning the threat of drones will persist as they can be launched from up to 1,500 miles away.

Troops from the United Arab Emirates or Saudi Arabia might even participate, he added. That’s because Iran’s continued control of the Strait of Hormuz, through which one-fifth of the world’s oil and liquified natural gas flows, would be unacceptable to its Persian Gulf neighbors.

As a result, any agreement to halt fighting that leaves Iran as the effective gatekeeper of the strait would likely lead to further fighting. Indeed, the UAE recently hinted at an increasingly hardened position toward Iran that aligns more closely with the U.S. and Israeli stance.

“Our thinking does not stop at a ceasefire, but rather turns toward solutions that ensure lasting security in the Arabian Gulf, curbing the nuclear threat, missiles, drones, and the bullying of the straits,” Anwar Gargash, a senior UAE diplomat, wrote on X last weekend. “It is inconceivable that this aggression should turn into a permanent state of threat.”