Iran's proxies escalate violence by killing American soldiers

Summary:?

Iran's denial of involvement in an attack that killed three U.S. soldiers has increased pressure on President Joe Biden to respond. The U.S. had blamed "radical Iran-backed militant groups" for the drone strike, but Tehran's mission to the U.N. has denied any link to the assault. This raises tensions between the U.S. and Iran and pressures the Biden administration to take action.?

Analysis:

Since Hamas launched a brutal attack on Israel on October 7th, Iran-backed groups have carried out 160 drone and rocket attacks on American outposts in the Middle East. Most of these attacks were unsuccessful, either missing their targets or being intercepted. However, on January 28th, a drone attack succeeded in hitting an American outpost in Jordan, resulting in the deaths of three American soldiers and injuries to 34 others. This incident is believed to be the first deadly aerial attack on American ground forces since the Korean War.

The attack has put significant pressure on President Joe Biden to respond forcefully. It is also expected to exacerbate the ongoing political violence across the Middle East, from Lebanon to Yemen. According to statements from President Biden and the Pentagon's Central Command (CENTCOM), the attack involved a one-way attack drone that struck Tower 22, a small outpost located in the extreme northeastern corner of Jordan along the border with Syria. Tower 22 has been in use since 2015, initially for training rebels opposed to Bashar al-Assad's government in Syria and later for supporting Kurdish forces in their fight against the Islamic State group. The outpost is believed to have limited air defences and serves as a crucial logistics hub for the Tanf base in Syria, situated just 20 kilometres across the border. Tanf houses several thousand American and allied special forces and has been the target of multiple attacks since the October 7th incident. Interestingly, Jordan's government publicly denied any attack on its soil, suggesting that it may have occurred at Tanf instead.

The groups responsible for the attacks on American troops in the Middle East are described by President Biden as "radical Iran-backed militant groups operating in Syria and Iraq." These groups have received support and training from Iran's Islamic Revolutionary Guard Corps (IRGC). Some of these militants operate under the umbrella of the "Islamic Resistance in Iraq," and a few have been formally integrated into Iraq's armed forces, which complicates the U.S. response.

These militant groups have conducted numerous attacks using drones and rockets against American bases in the region. Before the incident in Jordan, there was an attack on Asad air base in western Iraq, resulting in traumatic brain injuries to two American soldiers.

In response to these attacks, the United States has carried out retaliatory actions eight times, including airstrikes in Iraq. Some of these retaliatory strikes targeted Iranian assets, such as an IRGC weapons depot in eastern Syria on November 8th and an IRGC-linked training facility and safe house in the same region on November 12th.

Additionally, President Biden has launched nine rounds of strikes against the Iran-backed Houthi group in Yemen in response to missile strikes on shipping in the Red Sea. Despite these actions, disruptions to global shipping continue, as evidenced by the recent missile strike on a tanker carrying fuel off the coast of Aden on January 26th.

The President faces increasing political pressure, particularly from Republicans, to take more robust measures against Iran, although his response remains non-committal at this time.

A military response is imminent; the critical question is its extent. Another round of limited strikes against Iran-backed groups in Iraq and Syria will fail to satisfy domestic critics and won't effectively deter further Iranian attacks. President Biden may target more significant IRGC (Islamic Revolutionary Guard Corps) assets in these nations. Alternatively, a direct strike on Iran is an option. President Biden faces a dilemma: while modest retaliations may seem insufficient, heavy retaliation could create other challenges. Large-scale attacks in Iraq could further strain relations with the government in Baghdad, granting Iran a political victory.

Iran could escalate tensions elsewhere. Hezbollah, an Iran-backed militant group in Lebanon, has been engaging in missile exchanges with Israel for months. Concerns exist that Israel might launch an attack or invasion, and the U.S. has urged restraint; Iran might encourage Hezbollah to intensify these actions. Additionally, Iran could expand attacks to a broader range of American targets, including diplomatic and civilian sites, beyond military bases.

A full-blown conflict with Iran would likely lead to a surge in oil prices, particularly if transit through the Persian Gulf is disrupted or Iranian attacks on Saudi Arabian oil infrastructure occur. The price of Brent crude oil has risen from $73 in early December to $84 as of January 26th. Further increases would impact gasoline prices in an election year.

Lastly, these events unfold as the U.S. and its allies seek to negotiate a pause in the Israel-Hamas conflict and a hostage agreement, with hopes of eventually ending the war or at least reducing tensions. An eruption of violence between the U.S. and Iran could jeopardise efforts to restore calm before Ramadan, the Muslim holy period beginning in March.

Analysts suggest that the U.S. will aim for a proportionate, non-escalatory, effective, and deterrent response.? However, this is challenging given the current regional conditions and active hostile actors, and trade-offs will be necessary.

Potential Economic Impact:

1. Oil and Gas Market Fluctuations

• Global Energy Prices: The Middle East's vast oil and gas reserves make it a critical player in the global energy market. Geopolitical tensions Israel-Gaza, Iraq and Syria or the Saudi-Iranian rivalry, lead to fluctuations in oil prices. These changes can ripple effect on global energy costs, affecting economies worldwide.
• Supply Chain Disruptions: Recent conflicts have disrupted supply chains, impacting oil and gas production and transportation. The Strait of Hormuz, a strategic chokepoint, and the Red Sea shipping lane have been recurring flashpoints, and the closure or threat thereof can severely impact global oil supplies.

2. Investment and Economic Development

• Foreign Direct Investment (FDI): Persistent instability can deter foreign investment, which is crucial for economic development. Regions embroiled in conflict or political turmoil often face challenges in attracting FDI.
• Infrastructure and Development: Ongoing conflicts often destroy critical infrastructure, hampering economic growth and requiring substantial funds for reconstruction.

3. Trade Implications

• Regional Trade: Geopolitical tensions disrupt regional trade routes and agreements, impacting economic relations between neighbouring countries. For instance, the Qatar blockade by Saudi Arabia and its allies disrupted regional trade dynamics.
• Global Trade: The Middle East's strategic location as a bridge between Asia, Europe, and Africa makes it vital for global trade. Tensions affect shipping routes such as the Suez Canal and the Red Sea, which are pivotal for international trade.

4. Impacts on Energy Transition and Climate Initiatives

• Renewable Energy Shift: Geopolitical tensions can accelerate or decelerate the global shift towards renewable energy. Fluctuating oil prices can either incentivise or discourage investment in alternative energy sources.
• Climate Change Initiatives: Regional conflicts can sideline mitigation efforts, as immediate security concerns take precedence over long-term environmental strategies.

5. Economic Impact on Population

• Humanitarian Costs: Wars and conflicts lead to increased humanitarian crises, with immense costs in terms of human suffering and economic support required for refugees and internally displaced persons.
• Unemployment and Poverty: Prolonged instability can exacerbate unemployment and poverty, leading to economic hardship and further unrest.

Conclusion

Geopolitical tensions in the Middle East have far-reaching economic implications that extend well beyond regional boundaries. The interplay between energy markets, investment, trade, and humanitarian aspects illustrates the complexity of the region's geopolitical landscape. Understanding these dynamics is crucial for policymakers, investors, and international organisations to navigate the challenges and opportunities in this strategically significant region. Future stability in the Middle East hinges on resolving political and military conflicts and addressing the underlying economic disparities and uncertainties exacerbated by these tensions.