Recent attacks on Israeli
embassies around the world appear to signal Iran’s reaction to the
covert war being waged against it, and to the tightened sanctions, which
are aggravating the effects of the regime’s economic mismanagement.
Likewise, the recent escalation in cross-border fighting between Israel
and Gaza-based Palestinian militants could be a sign of things to come.
The next few weeks could
bring a reduction in tensions, as the US, France, Germany, the United
Kingdom, China, and Russia go through another round of attempts to
prevent Iran from developing nuclear weapons or the capacity to produce
them. But if this attempt fails, as is likely, one cannot rule out that,
by summer, Israel and the US agree that, sooner rather than later,
force will have be used to stop Iran.
Indeed, while Israel and the
US still disagree on some points – Israel wants to strike this year,
while the Obama administration is opposed to military action before
facing the voters in November – the two sides are converging on aims and
plans. Most importantly, the US is now clearly rejecting containment
(accepting a nuclear Iran and using a deterrence strategy). So, if
sanctions and negotiations don’t credibly work, the US (a country that
doesn’t “bluff,” according to Obama) will have to act militarily against
Iran. The US is now providing bunker-buster bombs and refueling planes
to Israel, while the two militaries are increasing joint military
exercises in case an attack becomes necessary and unavoidable.
If the drums of war grow
louder this summer, oil prices could rise in a way that will most likely
cause a US and global growth slowdown, and even an outright recession
if a military conflict erupts and sends oil prices soaring.
Moreover, broader
geopolitical tensions in the Middle East are not fading, and might
intensify. Aside from deep uncertainty regarding the course of events in
Egypt and Libya, now Syria is on the verge of civil war, and radical
forces may get the upper hand in Yemen, undermining security in Saudi
Arabia. There is still concern about political tensions rising in
Bahrain and Saudi Arabia’s oil-rich Eastern Province, and potentially
even in Kuwait and Jordan, all areas with substantial Shia populations
or other restless groups.
Now that the US has left
Iraq, rising tensions between Shia, Sunni, and Kurdish factions do not
bode well for the country’s ability to boost oil production soon. There
is also the ongoing Israel-Palestine conflict, tension between Israel
and Turkey, and hot spots – particularly Afghanistan and Pakistan – in
the wider neighborhood.
Oil is already well above
$100/barrel, despite weak economic growth in advanced countries and many
emerging markets. The fear premium might push prices significantly
higher, even if no military conflict ultimately takes place, and could
trigger a global recession if one does.
