With Israel and Iran trading missiles, the global economy looks precarious once again

Australia Broadcast Center

8 hours ago

Three questions remain after Israel's attack on Iran during the past few days.
First, with two parts: will Iran now accelerate its nuclear weapons program in response, and can Israel stop that from happening?
Second, will Iran block the Straits of Hormuz, through which passes a quarter of the world's seaborne oil and a third of the gas?
And third, will Israel take out Iran's oil production facilities on Kharg Island?
The answers to the first are probably yes and no, and if either or both of the other two are "yes," it would be disastrous for the global economy.
Israel's strike against Iran was inevitable as soon as the International Atomic Energy Agency reported on May 31 that Iran had enriched more than 400kg of uranium to 60 per cent.
The report was embargoed until last Wednesday, June 11, although Mossad would already have known the contents. The Israeli government couldn't let it stand.
It was also probably inevitable once Donald Trump, in May 2018, withdrew from the Joint Comprehensive Plan of Action (JCPOA) that Barack Obama had signed with Iran three years earlier, and then reimposed all sanctions.
Trump's complaint, apart from the fact that Obama did it and not him, was that the agreement was not permanent, and IAEA inspectors didn't have full access to all sites. Both of which were true, but at least for a few years, Iran seemed to have stopped enriching uranium, or at least the IAEA couldn't find evidence that it hadn't.
But in 2019, Iran's effort to become a nuclear-armed state was back to full steam ahead, and in the past few months, it went to a new level.
In a footnote on page 8 of its May 31 verification report for United Nations resolution 2231 (with which the UN endorsed Obama's JCPOA), the IAEA noted that it had "verified all 432.3 kg of UF6 enriched up to 60 per cent U-235 that has been produced since 21 November, 2022".
(UF6 is uranium hexafluoride gas used to enrich uranium with a centrifuge. U-235 is the unstable, or fissile, uranium isotope needed for a chain reaction bomb, and for that to work, the uranium must be enriched to 90 per cent U-235. There is no civilian use for 60 per cent enriched uranium — it has no purpose other than as a precursor to the 90 per cent enrichment needed for nuclear weapons.)
In its February report, the IAEA said Iran's stockpile of 60 per cent enriched uranium was 265.7kg, in November it was 147.8kg, and in August it was 132.1kg. So, it has increased by 62 per cent in three months and tripled in nine months.
Then, on Thursday last week, the day after the IAEA report became public, Iran announced it would launch a new enrichment facility in a "highly secure" place in response to the adoption of a "political" resolution against it by the IAEA, which accused Iran of "non-compliance" with its nuclear commitments.
It was the final straw, and the last in a series of catastrophic mistakes by the Iranian leadership that left it vulnerable and friendless.
On Friday, Israel attacked.
us military parade
Apart from pre-empting Iran's nuclear capability, Israeli PM Benjamin Netanyahu also wanted to pre-empt the planned new talks between Iran and the United States that were due to get underway on the weekend to coincide with Trump's birthday military parade yesterday.
Netanyahu would also have been keen to change the subject away from Gaza, with increasing, and increasingly credible descriptions of Israel's conduct there as genocide.
The oil price surged more than 7 per cent on Friday after news of the attack hit commodity traders' screens, and any thought of the price staying below $US60 a barrel this year now seems dead.
This latest conflict between Israel and Iran is very different from the skirmishes that took place in April and October last year, and which did nothing to disturb oil's slide from $US89 in early 2024 to $US58 at the end of April this year.
Importantly, Israel did knock out a lot of Iran's air defences in October in response to some ineffective Iranian missiles, but decided not to "take the win" as president Joe Biden advised.
This time, Israel, emboldened by its "success" in Gaza, now seems to think it can win against Iran and de-fang its nemesis entirely.
The attack this time was not part of a sort of chess move-and-counter-move process; it was done without US help, as Secretary of State Marco Rubio has made clear, and it gave Iran's leaders no off-ramp to avoid an uncontrolled escalation.
Yet, all-out conventional war, as in Ukraine, is unthinkable. Neither side can viably invade the other, so the conflict will be confined to missile strikes, drones, and targeted assassinations, which Netanyahu has vowed to keep going until the nuclear threat is removed.
But as the two sides go at it, and with the Straits of Hormuz and Kharg Island at risk, the oil price, global inflation, and the world economy are once again in a very precarious spot.
Donald Trump, for one, thinks it will all be fine. He told the Wall Street Journal in an interview: "I think ultimately, it … should be the greatest thing ever for the market. Iran won't have a nuclear weapon that was a great threat to humanity."
That could be true eventually if Israel really could stop Iran from having a nuclear weapon, but short of regime change, that is questionable.
This is the most telling Israeli attack since its 1981 destruction of Iraq's nuclear reactor near Baghdad, in Operation Opera, but Iran's enrichment facilities are deep underground in protected sites that would challenge even the most powerful conventional US-made bombs.
Iran's nuclear program will suffer a setback, and as Israel's assassinations by agents on the ground have demonstrated, the generals and scientists running the program are more vulnerable and may be hard to replace.
What happens next could depend on how effective Iran's direct retaliation is against Israel.
Some strikes on Tel Aviv and Haifa have been getting through, but if Iran's leadership judges that they're not doing enough damage, they might be inclined to try something else, such as an attack on Saudi Arabian oil production or desalination, US military bases, or the Straits of Hormuz.
Any of those things would be counter-productive for Iran and probably disastrous, both for Iran and the world economy.
But Iran's leaders have left themselves with few options.
Alan Kohler is finance presenter and columnist on ABC News and he also writes for Intelligent Investor.