Middle East Regional War
Why an Israel – US – Iran war is becoming more likely by 2025, plus indicators and detailed commercial implications.
Commercial Takeaway: Insurers may wish to examine their exposures to high value chemical and energy assets in Israel, to residential assets in northern Israel, to Israeli transport infrastructure (buses, light rail, ports, shipping, airports and aviation), to shipping, aviation and energy assets and infrastructure in the Persian Gulf and to energy shipments traversing the Persian Gulf and the Red Sea. Security managers may do well to examine scenarios for large-scale and rapid evacuations from Israel and the Gulf via Jordan or Jeddah. Company owners may benefit from considering contingencies for a war lasting up to 6-8 weeks impacting just Israel, Gaza, Iraq, Yemen and Lebanon, or the entire region, including Iran and the Persian Gulf. Shippers and their customers may wish to consider the impact of an increase in insurance premiums and in journey durations.
Analysis:
Expansion of conflict within Israeli-governed territories almost certain:
Israel’s proposed imposition of the death penalty on convicted terrorists, its plans to expand Jewish access to the Temple Mount/Haram al-Sharif complex and its internal divisions over judicial reforms all make military escalation due to localised incidents more likely.
Israel’s current government includes parties that are the mirror image of Hamas and the Palestinian Islamic Jihad, in that they want all the territory of mandate Palestine as part of a monocultural state. The current cabinet is arming citizen militias to defend against Palestinians. These armed citizen militias, in a conflict scenario where the security services are stretched, would seek to expel Palestinians from some regions to further their objective of an overwhelmingly Jewish Israel that securely controls Jerusalem, Judea and Samaria/al Qods and the West Bank.
Mahmoud Abbas, the head of the Palestinian Authority, is 87. His death will probably pave the way for internal conflict and chaos within the West Bank (Judea and Samaria), as those who lose out in the succession battle choose to boost their popularity by supporting Palestinian insurgency.
These dynamics pave the way for violent, widespread ethnic conflicts between the Arabs and the Jews in all Israeli-governed territories. In this scenario, it will be mainly cells operated by Hamas and Palestinian Islamic Jihad that target Israel and Israeli citizens, armed and unarmed, both from Gaza and the West Bank.
Iran’s allies and Israel appear to have already decided to escalate:
Israeli doctrine has changed. Israel is now focused on holding Iran directly responsible and retaliating against Iran directly for acts by Iran’s proxies. Crucially, this is an establishment decision and precedes Israeli Prime Minister Netanyahu’s return to power.
Iran, for its part, still appears committed to avoiding getting pulled in, preferring to respond with proxies. The Megiddo attack, in which Israel suspects Hizbullah, can be understood as retaliation for Israeli strikes on Isfahan in Iran. Our view is that the Isfahan attack itself was retaliation for an increase in Palestinian attacks against Israeli targets.
This dynamic means that Jewish-Arab conflicts within Israel and the West Bank can draw in the Popular Mobilisation Units of Iraq, Hizbullah, Hamas, the Palestinian Islamic Jihad, the Ansar Allah (Houthi) Movement as well as Iran itself. Conflicts within Israeli-governed territories would result in Israeli retaliation against Iran, which would result in Iran using its proxies against Israel. This in turn would cause additional Israeli reactions, and so on.
The Gaza-based factions will be the first to join. The others will join if they assess it is necessary to preserve the ability of the Gaza-based factions to survive and re-emerge after the conflict, or if they assess that their participation will help tie down Israel and force it to seek a ceasefire, for example, by firing high precision cruise missiles from Iraq or Syria at Israeli airbases.
This conflict will play out in multiple rounds. The more rounds are fought, and the more frequently they recur without either side imposing deterrence on the other, the more likely is greater escalation. This can become an escalatory ladder that all sides find it difficult to climb down from.
US more likely to be drawn in than ever before:
Thus far, the US had assessed that war with Iran was not worth the excessive cost that Iran could impose. However, this calculus is changing.
With Israel under attack from multiple fronts, US involvement will become likely. Not merely to support Israel, but, critically, to re-establish US dominance in the Middle East, and prevent the drift of Middle Eastern countries to the Chinese and Russian orbit.
Additionally, the US and Israel have lost the various proxy wars against Iran in which Saudi Arabia and Gulf Arab states were involved, including in Iraq, Syria, Lebanon and Yemen. This forces them to either back down or join the fight themselves. Israel cannot back down, as this conflict is existential for it. Israel also carries enough importance for the US to draw the US in.
Also relevant is Iran’s ability to enrich uranium to near weapons grade. Iran is enriching to 60% but can easily go beyond that. It can also acquire the technical capability to mount a device on a warhead through North Korea. US efforts to stop the Iranian nuclear programme through sanctions and diplomacy have failed.
Political aims can be pursued diplomatically or militarily, directly or through proxies. The US has lost the diplomatic options and most of its proxy military options.
As such, in one of the rounds previously mentioned, the US may well decide that it is time to pressure the Israelis to escalate significantly against Iran, as a prelude to the US joining Israel in the conflict.
The US can join this conflict in one of two ways – directly and openly, or, more likely, by providing Israel with intelligence about Iranian anti-aircraft systems, refuelling capability to keep Israeli jets in the air, and filling in some critical gaps in Israel’s war machine, including Massive Ordnance Penetrators fired from B2 Spirit jets to strike Iran’s nuclear infrastructure.
In either case, engaging in this conflict would permit the US to retain its hegemony in the Middle East. Middle Eastern waterways, including the Strait of Hormuz, the Red Sea and the Suez Canal are critical for the US’ role as the naval superpower that secures global trade routes.
If the US does not engage in conflict, its influence in the region will fade and its ability to maintain its hegemony in the Middle East will decline, benefiting China and Russia.
Commercial implications for Israeli assets if the war draws in Iran’s allies:
Israeli ships, ports and other maritime assets would likely be targeted from Lebanon, Syria and Gaza and Yemen, with a view towards cutting off Israeli trade and imposing a siege on Israel.