By Carl Tannenbaum

Israel’s attack on Iran is a substantial escalation of hostilities in the Middle East.  Following is some background, and thoughts on potential economic consequences.

Iran’s nuclear program has been of concern for a number of years.  It is particularly threatening for Israel, which sees it as an existential threat.  A combination of negotiation and selected intervention has failed to stop progress.

The timing of the decision to proceed was likely rooted in the following:

a)   Israel has been apprehensive about nuclear negotiations between the US and Iran, which might leave some of Iran’s nuclear infrastructure in place.  Talks were scheduled to continue this weekend, potentially adding to Israel’s sense of urgency.

b)   Iran’s proxies in the region have been weakened over the last year, deterring retaliation.

Israeli prime minister Benjamin Netanyahu’s ruling coalition had become tenuous.  A dissolution of government and new elections were a very real possibility, which added pressure to address the threat posed by Iran.

Substantial fractions of Iran’s defense infrastructure and leadership have been eliminated, and Israel is committed to reducing this further.  Coordinating a counterattack will be difficult, but experts expect that one will almost certainly come.

The scale and form of ongoing hostilities could have an impact on the global economy.  The oil market is a primary focus; strikes could damage infrastructure in Iran or other countries, and Iran might try to interrupt shipping through the Strait of Hormuz. More than 20% of the world’s oil travels through this channel.

During the past year, other oil producing countries in the region have gone out of their way to lower hostilities with Iran and its proxies. Iran would be wise not to make them adversaries.  And attacks on tankers will almost certainly provoke a tough international response.  In light of this, crude prices increased after the attacks, but modestly.

Economic and financial damage would increase if the conflict broadened. Iran has drawn closer to Russia and China in recent years, receiving aid from both.  Iran sells a substantial amount of oil to China, in violation of sanctions imposed by the United States.  But the threat of U.S. sanctions, not to mention existing stresses facing Russia and China, should keep the two on the sidelines.

As always, we will be monitoring the situation closely, and will endeavor to keep you current.