Scott Bessent says oil could fall to $40 a barrel if the Iran war ends, a scenario that would reshape inflation and Treasury yields but carries major risks for investors and US debt policy
Oil prices above $90 a barrel may not persist if Treasury Secretary Scott Bessent's scenario unfolds. Bessent anticipates that once the U.S.-Iran conflict subsides, a surge of new supply could enter the market, potentially driving crude prices down to $40 a barrel-a level last seen during the pandemic downturn. For investors and policymakers, the implications are immediate: a sharp decline in oil would reverberate through inflation, interest rates, and the cost of servicing America's record debt.
On September 7, 2026, Brent crude closed at $97.31 per barrel, its highest since July, following renewed U.S. and Iranian strikes on oil infrastructure and shipping.
At present, market dynamics are moving in the opposite direction. Brent crude traded above $95 a barrel on September 4, with West Texas Intermediate near $91, as renewed U.S.-Iran hostilities heightened concerns over supply disruptions. According to a Reuters financial review, Brent rose 7.6% and WTI nearly 10% in just one week, underscoring the market's sensitivity to geopolitical risks. The 10-year Treasury yield reached its highest level since 2023 at the end of August, reflecting persistent inflation concerns and the risk that Middle East tensions could keep energy prices elevated. Bessent's scenario would require not only a ceasefire but also a rapid transition from tight supply to a global surplus-an outcome that has yet to materialize despite repeated forecasts of increased production.
To address rising yields, Bessent's Treasury has doubled the size of its buyback operations for longer-dated bonds, temporarily pulling the 30-year yield down from a 19-year high after it exceeded 5.3%. However, the pressure remains. The U.S. national debt has already surpassed $40 trillion, months ahead of Congressional Budget Office projections, and the deficit is on track to reach $2.1 trillion this fiscal year. Each increase in yields directly raises refinancing costs, compounding fiscal challenges for Washington.
Foreign moves and market signals
Reuters reported that Bessent described Iran's recent strikes as a response to 'economic strangulation,' highlighting that Iran's currency hit record lows and inflation soared to 66%, while the U.S. prepared new banking sanctions.
For investors, current volatility is tangible. Energy analysts have shifted from warning that Brent could surge to $150 a barrel if the Strait of Hormuz remains blocked, to now considering the possibility of a drop to $40 if peace is achieved and supply increases. Citi, for instance, has revised its oil forecasts multiple times this year as the conflict's outlook has changed. The only constant is uncertainty-and the reality that geopolitical events can rapidly overturn market expectations.
Investor impact and practical risks
If Bessent's scenario occurs, immediate beneficiaries would include U.S. households and businesses facing lower fuel and borrowing costs. Declining oil prices would ease inflationary pressures, potentially enabling the Federal Reserve to pause or even reduce rates sooner than anticipated. Lower yields would also decrease the government's interest expenses, providing some budgetary relief. However, this outcome is far from assured. The Iran conflict remains unresolved, with no clear timeline for a diplomatic resolution. Meanwhile, foreign demand for Treasuries is showing signs of weakening, and yields remain high despite Treasury interventions.
Investors must weigh Bessent's optimistic scenario against ongoing geopolitical risks, evolving foreign capital flows, and a U.S. fiscal position that is becoming increasingly fragile. The risk is that betting on a rapid oil price decline or a sustained drop in yields could prove costly if the conflict persists or if foreign buyers continue to reduce their Treasury holdings. As Bloomberg analysts reported, Bessent believes the oil market could become "substantially oversupplied" after the Iran war, but this remains uncertain.
Bessent's scenario is ambitious, relying on a sequence of events that have not yet occurred. Until the Iran conflict is resolved and new supply enters the market, oil prices and yields are likely to remain volatile. For now, investors and policymakers should regard the prospect of $40 oil as a scenario rather than a baseline, and focus on the underlying realities of debt, deficits, and the stability of foreign capital. Relying on an ideal outcome is not a strategy-especially when the consequences of error are measured in trillions.
Oil and Treasury yields are often linked through inflation expectations, but this relationship is not always consistent. When oil prices fall sharply, headline inflation can decline and bond yields may drop as investors anticipate less aggressive Federal Reserve policy. However, other factors-such as fiscal deficits, foreign demand for Treasuries, and global risk sentiment-can override this connection. Investors should be cautious in assuming that movement in one market will automatically drive the other, particularly during periods of geopolitical tension or shifting capital flows.
