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Published: 8 October 2024
WHAT’S HAPPENING
The conflict in the Middle East escalated following attacks by Iran and Hezbollah on Israel on October 1. The attacks were among the largest targeting Israel since conflict broke out in the region last year.
Iran and Hezbollah’s attacks caused little damage in Israel, as its air defenses were able to intercept missiles and rockets fired at it.
Israel is expected to retaliate against Iran for the October 1 attacks.
On October 7, Israel launched strikes against Hezbollah targets in Lebanon and Hamas targets in Gaza. Hezbollah retaliated with rocket attacks that primarily targeted northern Israel.
Hezbollah fired rockets at Haifa, Israel (third-largest city) on October 7 as Israeli forces appeared likely to expand ground raids into south Lebanon.
Israel’s military conducted extensive bombings of Hezbollah targets in southern Lebanon.
Israeli military officials said its soldiers moved into Lebanon and that its naval assets will soon start to participate in attacking Hezbollah targets in Lebanon.
ESCALATION SCENARIOS & IMPACTS
Israel appears to be preparing retaliatory strikes on Iran, but the timeline for when those could occur is unclear. It is likely to occur imminently. There are effectively three paths to which the direction of the conflict may evolve in the near term – each with different impacts. From least impactful to most impactful, these are:
1. Israel targets IRCG-affiliated targets in Iran or elsewhere in the Middle East
Scenario: This would be Israel's most measured retaliatory action, and Iran would be well prepared for it. As a result, the limited damage to Iran could provide an off-ramp for escalation between the two nations.
If a limited attack occurs, Iran may take a de-escalatory path and not conduct additional retaliatory strikes against Israel.
Past responses by Iran – including its October 1 retaliatory strikes on Israel – showed it has little meaningful capacity to cause significant damage to Israel through missile strikes.
Moreover, its proxy groups in the region (e.g., Hezbollah) have been significantly degraded by Israel’s past operations, meaning that they do not possess significant capabilities to do meaningful damage to Israeli territory.
Iran instead may opt to take a longer-term approach toward Israel through continued support of proxy groups that do limited damage to Israel and supporting international terrorism operations against Israeli targets abroad and foreign Jewish populations.
Impacts: This scenario would present the fewest impacts on supply chains.
De-escalation of the conflict could allow oil prices to decrease from recent highs.
2. Israel attacks Iran’s nuclear targets
Scenario: Israel could attack Iran’s nuclear weapons program or energy infrastructure.
Attacks on Iran’s nuclear infrastructure would likely provoke a more significant response from Iran, which could inc.
Impacts: This scenario would see energy prices increase and open the door to a more significant escalation between Iran and Israel.
This escalation scenario drastically raises the risk of attacks impacting critical supply chain nodes or production facilities (particularly those that also supply the Israeli military in sectors like semiconductors and chemicals).
Regional shipping lanes would likely see increased attacks by groups affiliated with Iran, particularly the Houthis in Yemen.
3. Israel targets Iran’s oil infrastructure
Scenario: Israel could attack Iran’s oil infrastructure. However, this is less likely since it would likely require cooperation from security partners, including the United States, who are not eager to see further escalation.
Attacks on Iran’s energy infrastructure would likely open the door to a more significant escalation in the conflict, particularly since it would suggest a broadening of the war and increased engagement by the United States and other countries in the region.
In response, Iran may escalate the conflict into a more regional conflict by disrupting the Strait of Hormuz—the narrow waterway through which some 30% of the global oil trade passes. This outcome becomes more likely under this scenario since curbing regional oil exports will damage Iran's energy infrastructure significantly.
Additionally, Iran would likely increase its attacks and support its proxy groups’ attacks on Israel, raising the risk of more significant infrastructure damage in Israel.
Impacts: This scenario would see energy prices increase and open the door to a more significant escalation between Iran and Israel.
Iran accounts for about 3% of global oil output, and damage to its energy production and export infrastructure would push global oil prices higher, at least until the end of the year. Oil prices of $100/barrel would be possible.
In addition, like the scenario above, this escalation scenario would also present risks to Israel’s infrastructure and regional shipping lanes.
Publisher's note: This content originally appeared on PRISM's NextRisk platform, a risk identification and monitoring tool for procurement organizations. Learn more on our website.
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