Iran Missile Attack on Israel: Escalation and Impact on Oil Market

How will Israel Respond?

Tensions between Israel and Iran have escalated significantly following a missile attack by Iran on Israel, which resulted in damage to a school and reports of casualties. Israeli Prime Minister Netanyahu warned of severe consequences for Iran’s actions, while Iran threatened vast destruction in response to any Israeli retaliation. The U.S. expressed strong support for Israel, with military backing, amidst fears of a wider regional conflict.

Key Points

• Missile Attack: Iran launched 180 ballistic missiles at Israel, marking a severe escalation in conflict.
• Israeli Response: Israel vowed to retaliate with painful consequences for Iran.
• S. Support: The U.S. affirmed its support for Israel and stated discussions were ongoing regarding the response. However, the US wants a measured response by Israel and does not want this to escalate further.
• Regional Tensions: Both sides are on edge, with fears of a broader war increasing due to the involvement of allies and proxy forces.
• Casualties and Damage: The conflict has resulted in significant casualties in Lebanon and damage in Israel, raising international concern.

Diplomatic Reactions

• International Community: The UN and several countries have called for restraint from both Iran and Israel, urging them to seek diplomatic solutions to avoid further escalation.
• Regional Allies: Countries in the region, including Saudi Arabia and Egypt, have expressed concern over the potential for a wider conflict that could destabilize the Middle East.

How a Weak Iran might Increase Geopolitical Risk

Recent events have highlighted Iran’s precarious position following the Israeli airstrike that killed Hezbollah leader Hassan Nasrallah. Iran’s Supreme Leader Ali Khamenei condemned the strike but refrained from a direct vow of retaliation, leading to concerns about Iran’s perceived weakness. The lack of decisive action reflects Iran’s limited options against Israel’s superior military capabilities and increasing risk aversion. Historically, Iran has focused on maintaining internal stability and avoiding wider conflict, particularly given the political implications of war with Israel. Despite having the capability to develop nuclear weapons, Khamenei is hesitant to pursue this path due to the associated risks, especially further economic sanctions.

Key Points

• Khamenei condemned the Israeli airstrike on Nasrallah but did not promise decisive retaliation, raising concerns about Iranian weakness.
• Iran’s reluctance to respond decisively is influenced by its limited military options and fear of escalation.
• The Iranian leadership is caught between a commitment to security and the realities of regional instability and potential expansion of US sanctions along with allies.
• While Iran has nuclear capabilities, Khamenei remains hesitant to pursue a nuclear weapon, fearing the consequences of escalation. This calculation is a cost-benefit analysis on what they gain versus the consequences of further risk to thier economy.
• The ongoing situation poses a challenge for Iranian leaders as they navigate external pressures and internal expectations.The situation in Iran is complicated by various factors, including regional dynamics, the influence of proxy groups, and the ongoing tensions with the United States.
• The Iranian leadership must balance the desire to project strength and support its allies, such as Hezbollah, while also avoiding direct confrontation with Israel that could lead to devastating conflict. T

In short, we do not see Iran as wanting to escalate further. In terms of strategy, if Israel escalates by striking nuclear targets, then Iran will re-evaluate the cost benefit of going nuclear versus hope for economic gain. In this case, they will overweigh security versus economic gain and become a nuclear state.

Iran has been making overtures to the US on improving relations with the west. This is aimed at getting some relief on the economic sanctions with the eventual revival of the JCPOA agreement where Iran agrees to refrain from nuclear weapons development.

The US, especially if Harris wins the Novemeber elections, seems to be moving in this direction as well.

However, Prime Minster Netanyahu of Israel has been an opponent of the JCPOA agreement. Thus, he might have some incentive to go against US wishes and escalate by attacking nuclear sites. Biden has clearly stated that the US does not support this option. With the election 5 weeks away in the US and with the potential of a Trump win, perhaps Netanyahu takes a gamble.

The risks to the oil market are high if Israel attacks a nuclear site since this will mean the tensions will boil over and Iran has to respond hard. One option would be to attack shipping in the strait of Hormuz, pushing the geopolitical risk premium of oil to $20 to $30 dollars a barrel or more.

An Israeli attack on oil production facilities would also escalate things. However, a surgical strike on perhaps the oil refining capacity of Iran gearing to the domestic market would be result in a more muted Iranian response.

The ideal option is that Israel only retaliates by hitting military targets in Iran. This is the hoped for option to keep tensions reasonable.