Markets Are Mispricing Iran War Risk, Brooks Warns
The Brookings economist argues that financial markets significantly underestimate the potential for economic disruption from the Iran conflict, as Brent crude surges 14% and strategic chokepoints close.
Financial markets are underpricing the economic disruption risk from the Iran conflict by a significant margin, according to Brookings Institution economist Robin Brooks, who warns that investor complacency could trigger sharp corrections if the situation deteriorates.
Brooks characterized the 14% surge in Brent crude since Friday as “stunning,” noting the move is more than three times larger than the oil price jump when Russia invaded Ukraine in February 2022. With approximately 20 million barrels of oil passing daily through the Strait of Hormuz, the scale of potential disruption in the current crisis could exceed that of 2022. Yet the crude oil market is not pricing in a major disruption in the Strait of Hormuz, according to analysis from the Brookings Institution.
Scale Exceeds Ukraine Precedent
Brooks warned that oil prices will spike and Markets will differentiate between winners and losers, with oil exporting countries bid up and importers sold off. The pattern mirrors February 2022, when the Brazilian Real became the world’s best performing currency as markets recognized it for being a big commodity exporter.
But when markets started trading, the Brent oil price was up to $76.3 from $72.5 at Friday’s close—a five percent rise that Brooks called “pretty modest.” One reason is that Brent had already been moving up in recent weeks as markets braced for war. By March 3, however, Brent was up a stunning 14% from Friday with disorderly strengthening in the Dollar as global risk-off builds.
According to Benzinga, Brooks called it a risk-off session, with markets “trading Iran like it’s a big shock — not a little one,” as WTI crude pushed toward $81 a barrel and coal jumped over 8%. Brooks argued that markets often understate the significance of unexpected events.
Historical Pattern of Underpricing
Geopolitical risks are challenging for investors to price due to their unique nature, rare occurrence, and uncertain duration and scope, which can lead to sharp market reactions when shocks materialize. Research from the International Monetary Fund shows that stock valuations decline by an average of about 2.5 percent following the involvement of a main trading partner country in an international military conflict.
Markets have historically struggled to price geopolitical risk in advance, with investors preferring to react once outcomes become clear rather than positioning for uncertain scenarios. According to analysis from Pepperstone, the prevailing assumption appears to be that tensions will rise rhetorically without escalating into worst-case outcomes, but this approach leaves markets vulnerable to abrupt repricing when perceived probabilities change.
Brent crude oil prices surged 10-13% to around $80-82 per barrel by 2 March 2026, with Iran’s closure of the Strait of Hormuz disrupting 20% of global oil supplies. Analysts forecasted prices could reach $100 per barrel if disruptions persisted, potentially adding 0.8% to global inflation.
Market Reaction Patterns
Global stock markets declined, with the Dow Jones falling over 400 points and the S&P 500 dropping 0.7% on 2 March, while European and Asian indexes fell 1-2%, reflecting fears of inflation and supply chain issues. South Korea’s KOSPI index suffered its biggest crash since the 2008 financial crisis, dropping up to 12% in a single day and triggering a circuit breaker on 4 March.
| Indicator | Iran Conflict | Ukraine Invasion |
|---|---|---|
| Brent Crude | +7% (single session) | +2% |
| S&P 500 | Flat to -0.7% | +2% |
| Brazilian Real | -1% | -2%+ |
| Oil Transit Risk | 20% global supply | Limited |
Brooks’ analysis highlighted three key transmission mechanisms. The “debasement trade” has two basic drivers: out-of-control fiscal policy and geopolitical risk, which is why reciprocal tariffs or the January fisticuffs over Greenland pushed up gold prices, and war in Iran will push up precious metals and safe haven currencies still further.
While the S&P 500 remained largely flat during the latest episode, compared to gaining around 2% on the day Russia invaded Ukraine, the dollar’s rally against both G10 and emerging market currencies signals a pronounced shift into risk-off mode. Gold’s behavior also differs markedly from 2022—whereas gold fell on February 24, 2022, it rallied in the current episode, reflecting its evolving role as a hedge against currency debasement and geopolitical fragmentation.
Trade Exposure Vulnerabilities
According to IMF trade data, the five biggest exporters to Iran are the UAE, China, Turkey, the EU and India, with markets seeing Turkey as particularly vulnerable at the margin despite Iran being a tiny economy. A sustained five percent rise in Brent implies a roughly two percent rise in the Brazilian Real against the Dollar and a one percent drop in Turkish Lira versus the Dollar.
The Strait of Hormuz is the world’s most important energy chokepoint. According to Kpler, about 31% of global seaborne crude flows transited the strait in 2025—roughly 13 million barrels per day. Unlike previous Iranian threats, this represents an actual supply disruption affecting crude, products, LPG, and LNG simultaneously.
According to Claudio Galimberti, chief economist at Rystad Energy, “We have not seen anything like this in pretty much the history of the Strait of Hormuz,” comparing the complete halt of oil flows through the bottleneck to blocking the aorta in a circulatory system.
According to Morgan Stanley, a conflict longer than a few weeks raises the odds of sustained economic pressure through higher oil prices, hotter inflation and less-certain financial conditions, with analysts noting that “markets may tolerate uncertainty for now, but prolonged uncertainty will be harder to look through.”
What to Watch
Brooks’ framework provides clear indicators for tracking whether markets will be forced to reprice risk more aggressively. Monitor the WTI-Brent spread for producer hedging pressure, watch for OPEC+ policy signals on whether spare capacity can offset disruptions, and track whether Iraq must shut in production if Hormuz access remains blocked.
The complacency indicator is simple: sustained Brent above $90 for one to two weeks would represent a meaningful headwind to domestic economic messaging and could prompt policy recalibration, similar to rapid tariff adjustments earlier this year. Events over the coming days and weeks will tell whether the crude oil market’s relaxed response to risk is the right one.
For investors, Brooks’ analysis suggests the key question is not whether markets can absorb a short-term spike, but whether they have adequately priced the tail risk of prolonged disruption. From a longer-term perspective, geopolitical risk is becoming a persistent part of the backdrop, not merely episodic, and investors may need to price in a world where regional blocs and strategic competition drive markets, risk premiums and asset allocation.