Global oil and gold prices fluctuated after reports that Israel had launched a retaliatory strike on Iran on Thursday, as traders hedged their risks on the back and forth attacks between the two countries.
The reported strike on targets in Iran’s central province of Isahan follow Iran’s barrage of missiles and drones aimed at Israel on April 13th. While most of the attacks on April 13th did not reach Israel’s territory, it marked a turning point in a long-running cold war that has been characterised by shadow and proxy fights. Iran said it was responding to an air attack on its consulate in Syria in early April, which left several high-ranking military leaders dead, and Israel spent the week weighing its retaliation.
Israel’s attacks on Thursday attacks came just hours after UN Secretary General Antonio Guterres warned the UN Security Council that “one miscalculation, one miscommunication, one mistake, could lead to the unthinkable.” The unthinkable would be a wider regional conflict, which would have ripple effects across the world.
Now, with the world holding its breath on just how far the two sides are willing to go in what has long been viewed as the region’s powder keg, business leaders are weighing the likely risks. For example, oil prices were expected to remain within the $70-$90 price band for 2024, but the events of the last week have raised the prospect that they might range in the $90-$100 per barrel range, or higher.
The Conflict
Iran and Israel’s long-running conflict has so far mainly involved proxy wars and attacks in third countries, avoiding direct engagement due to the likely spillover effects that could spark a wider regional war. Their conflict and its likely escalation into a full blown war has often been cited as the biggest security risk in the Middle East, one that would definitely draw in actors from across the globe on either side. The measured responses of the last week seem to have been “designed to maximise spectacle while minimising casualties”, global news site CNN said in reference to Iran’s attack on April 13th.
Since the two do not share a border, for example, the April 13th attack involved drones and missiles overflying Iraq, Syria, and Jordan. It also drew in significant participation from allies of the two countries. Israel’s retaliation on April 18th also involved attacks on Syrian territory, illustrating the multiple fronts the two countries would be engaged in a full-blown war.
A few days before the April 13th attack, Iranian troops had also seized a Portugal-flagged ship associated with an Israeli billionaire. These new escalations of direct engagement have ignited a long-running concern that eventually, Iran and Israel would attack each other more directly, and at a larger scale. Israel is armed with nuclear weapons, while Iran has been developing similar weapons for decades mainly as a deterrent against Tel Aviv.
Why it Matters
The ongoing Israel-Gaza conflict has already escalated the risk of spillover conflicts in the resource-rich and strategically vital region. It has also increased concern of a wider conflict, and how it would affect societies and economies in both the short term and the long term.
It has led, for example, to Houthis in Yemen disrupting maritime traffic on the Red Sea, significantly increasing insurance premiums and operational costs for shippers. The Houthis were also suspected of being directly or indirectly responsible for fiber optic cable cuts in the Red Sea in February. The Houthis have said that they will continue attacking American and British ships using the Gulf of Aden, the Red Sea, the Arabian Sea, and possibly on wider swathes of the Indian Ocean.
On April 13th, several countries closed their airspace, and airlines in the region cancelled some flights and rerouted others. Iran closed its western airspace to commercial flights, and cancelled flights to and from several of its major airports. With Israel attacking targets in the Gaza enclave, Lebanon, Syria, and now Iran, the likelihood of a critical mistake or an escalating event have risen significantly.
Governments and oil traders have always been concerned that if cornered, Iran could disrupt maritime traffic in the critical Strait of Hormuz, although that has seemed increasingly unlikely as Tehran has boosted its oil production, and exports to China. But the evolution from proxy wars and regional wars to limited strikes has revived war scenarios and the possibility of an escalating, no holds barred conflict.
An escalation could create a downward spiral in an already volatile region where disruptions would have ripple effects across the globe. Businesses worldwide will be following developments in the region in the coming weeks and months, as any changes will have significant effects on input costs, maritime routes, travel, and security.