Ever since the Hamas attack on Israel on Oct 7, the whole world has been fixated by the unfolding events in the Middle East.
But after 12 days, what do we really know?
Take for example the explosion at the al-Ahli hospital in Gaza City on Tuesday.
Hamas blamed it on an Israeli bombing while Israel and the US claim that it was the result of a misfired rocket by the Islamic Jihad.
The Hamas controlled Gaza health ministry said at least 471 people had been killed.
CNN cited a US intelligence assessment that estimates between 100-300 dead.
Agence France Presse quoted a senior European intelligence source who believes a maximum of 50 people were killed in the blast.
Because of propaganda and fake news, we need to go deeper if we really want to understand what is going on.
What do we know about the players involved in this war? What are their reaction functions? How will the war end? What are the main scenarios? Who will be the winners and who the losers?
Ever since the Hamas attack on Israel, financial market volatility has spiked.
This is especially true about the oil market where implied volatility is within striking distance of the 2023 high. (Chart 1)
Oil price rallied immediately after the attack, then sold off, then rallied again after Biden’s visit to Israel. (Chart 2)
It is clear that Wall Street has not made up its mind about what is still to come.
In this video, I will offer my prediction.
Just so that we are clear, my prediction has nothing to do with the humanitarian and moral dimensions of the Israeli-Palestinian conflict.
These are important issues but they are not my concern in this video.
My prediction will take the form of a scenario analysis that is based on my analysis of the objectives and constraints of all the parties involved.
Over the next ten minutes, I will take you through what I think are the 3 main scenarios for how the conflict will play out. I am going to assign a probability to each of the three scenarios and explain my rationale.
The three scenarios are:
1. A ceasefire within weeks that preserves the status quo in Gaza
2. A regional war
3. Prolonged localized conflict
Scenario 1: A Ceasefire that preserves the status quo in Gaza
In the wake of the Hamas attack on Israel on Oct 7, Israeli Prime Minister Benjamin Netanyahu swore to destroy Hamas’s capabilities.
His defense minister went further, promising to “wipe this thing called Hamas, ISIS of Gaza, off the face of the earth.”
Are these threats credible? What does history tell us?
In 2005, Israel dismantled 21 settlements in Gaza and ended its occupation of Gaza.
However, Israel’s disengagement from Gaza did not bring peace.
In 2007, Hamas gained complete control of Gaza after it defeated Fatah, its rival Palestinian faction that rules the west bank.
Since then, Hamas and Israel have fought three wars: in 2008, 2012, and 2014. Israel launched land incursions into Gaza during two of its campaigns.
In all instances, these wars ended with a ceasefire that preserved the status quo in Gaza.
A good example is the 2014 Gaza war that began with the kidnapping and the killing of 3 Israeli teenagers by Hamas.
Israel sent its army into Gaza but after 7 weeks of heavy fighting agreed to a ceasefire that left Hamas’s rule and military infrastructure in Gaza largely intact.
The Netanyahu government was criticized by many in Israel at the time for not finishing the job that it had started.
But the reality is that Israel was not prepared for the high human cost that the complete disarming of Hamas would have entailed.
The Israeli public was already in shock by the loss of 66 soldiers in 50 days. The estimate that another 500 soldiers could die if Israel were to go all the way was deemed too great by the Israeli government to justify the action.
Will history repeat itself? Will the new war produce another inconclusive outcome after a few short weeks of fighting?
Unlike today, Israel's leaders never vowed to destroy Hamas once and for all in its previous wars with Hamas.
What has changed is that today the Israeli public is demanding that Israel go all the way.
And the quest for justice is only a small part of the story.
The much bigger story is that the Hamas attack on Oct 7 has made people living in Israel, including my own family, feel incredibly insecure about their future.
The attack has inspired a strong belief among Israelis, whether they are in favor or against the two-state solution, that unless Israel pays the price of destroying Hamas now, one day Hamas might become strong enough to achieve its stated goal of destroying Israel.
This idea never crossed the minds of Israelis until the attack.
And now it is the only thing that is uniting Israelis across the political spectrum.
Unless this changes, it would be extremely difficult politically for the Netanyahu government to agree to a ceasefire that preserves the status quo in Gaza.
This week the head of the regional council of the kibbutz and villages along the Gaza border - now evacuated after the massacre - announced that the residents of these communities will never return unless the threat of Hamas terrorism is completely eliminated once and for all.
But what are the chances that a ceasefire is imposed on Israel from the outside?
On Monday this week a Russian backed UN security council resolution calling for a humanitarian ceasefire failed to get the 9 votes necessary to pass.
On Wednesday, a similar draft resolution calling for a humanitarian pause proposed by Brazil, was vetoed by the US on the ground that the text failed to acknowledge Israel’s right to self-defense.
The position of the Biden administration reflects American public opinion regarding the Hamas attack.
A CNN poll this week reveals that 71 percent of Americans feel a high level of sympathy for the Israeli people in the aftermath of the Hamas attack on October 7, versus only 41 percent who feel a strong sense of sympathy for Palestinians.
More importantly, 70 percent of Americans believe the Israeli government's military response to Hamas attacks is entirely or partially justified, versus only 8 percent of respondents who said the response is not justified at all.
There is another reason why Washington won’t be sorry to see Hamas gone.
The Biden administration is a strong backer of a two-state solution to address the Palestinian problem.
Hamas has been the biggest impediment to a two-state solution over the past 10 years.
Not only it’s stated goal of destroying Israel makes it impossible for any Israeli government to accept it as a negotiating partner, Hamas’ rivalry and feuding with the Palestinian Authority means there is no representative body that can speak for all Palestinians.
This is another reason why I think we could assume the US will give plenty of rope to Israel to accomplish her objective in this war.
And the US is certainly not alone in wanting to see Hamas gone.
The Egyptian government sees Hamas, an offshoot of the banned Muslim Brotherhood in Egypt, as a threat and a thorn on its side.
The Saudis view Hamas as a proxy of its Iranian foe.
For all the reasons that I've listed, the scenario of a ceasefire between Israel and Hamas, followed by a return to the status quo before the Oct 7 attack seems highly unlikely.
I would give this outcome only a 10% probability.
Of course, my view is predicated on the assumption that the Israeli army has not forgotten how to fight.
Should this scenario nevertheless materialize, the big winners would be Hamas and Iran while the losers would be Israel and the US.
Scenario 2: Regional war
Israeli bombing of Gaza since the Hamas attack on Oct 7 has killed thousands of Palestinians, according to Hamas.
It is reasonable to assume that once Israel’s launches its ground offensive, which could be very soon, Palestinian civilian casualties will go up.
The Iranian foreign minister, after meeting with the leaders of Hamas, Hezbollah, and Syria, said this week that “If the war crimes against the Palestinians are not immediately stopped, other multiple fronts will open and this is inevitable.”
This means we can expect the risk of a regional war to increase significantly once the Israeli army enters Gaza.
A regional war would be a disaster for the middle east and for the world.
It would likely trigger a big jump in oil price and likely a global recession.
If Hezbollah decides to open a second front against Israel, Biden will have no choice but to enforce existing sanctions against Iranian oil exports that have been surging over the past year to reach 1.2 million barrels a day in September. (Chart 3)
In a regional war, Iran could be drawn in too. Earlier this year, Tehran unveiled a ballistic missile with a range of 2,000 kilometers, enough to hit areas of Israel.
What is the likelihood that the Israel-Hamas war will morph into a regional war?
To answer this question, let’s think about who has the incentive to provoke a regional war.
It goes without saying that a regional war will serve Hamas’ interest. Indeed, it wouldn’t surprise me if this is its ultimate objective.
For the same reason that Hamas would love a regional war, Israel has a strong incentive to avoid it.
A regional war would stretch Israel’s military resources to their limit. I think we should assume that Israel will do anything and everything to avoid fighting on multiple fronts.
A regional war that sends the world economy into a recession will likely cost Biden his re-election next year. So we can safely assume that Biden is highly motivated to avoid a regional war too.
This is why Biden has ordered the deployment of not just one but two strike carrier groups to the Eastern Mediterranean. This is why he is sending a rapid response force, consisting of 2,000 Marines and sailors, to the waters off the coast of Israel.
This show of force by Washington is intended to provide a deterrent against Iran and Iranian proxies in Lebanon and Syria.
What about Hezbollah?
A regional war is not in Hezbollah’s interest either. Such a war could lead to its own destruction, especially given that US might decide to act if tested.
Hezbollah may be sitting on 200,000 rockets and missiles but its political clout in Lebanon is shrinking.
The Lebanese economy has contracted more than 20% since 2018 and hyperinflation has taken over. In August inflation hit 230%.
Amidst economic hardship, Hezbollah’s popularity in Lebanon is declining.
In the 2022 elections, Hezbollah and their allies lost their parliamentary majority, despite allegations of voter intimidation and vote buying.
Hezbollah lives off Iranian money but my guess is that they would rather keep their powder dry if they can.
Is a regional war in Iran’s interest?
I do not pretend to understand the interests of Iran’s ruling clerics, but I have to believe that the memory of the long and wide spread protests against the Iranian regime in 2022 is still fresh in the mind of the mullahs.
Moreover, Iranian leadership must realize that a regional war might finally compel Israel, alone or together with the US, to attack Iran’s nuclear infrastructure.
In a regional war, Israel is almost certain to get from the US refueling planes for the mission and the bunker buster bombs it will need to penetrate Iranian underground nuclear sites.
Besides Hamas, who else would benefit if a regional war breaks out?
The answer should be pretty obvious.
Russia and China.
For Russia, a regional war in the Middle East would divert limited US resources from Ukraine to Israel. It could turn the tide decisively in Russia’s favor in the Ukraine war.
For China, a regional war in the Middle East at the same time as the Russia-Ukraine war would provide a window of opportunity to take Taiwan.
China did not condemn the Hamas attack on Israel. Nor did Russia.
The fact that a regional war in the Middle East would serve the interests of both China and Russia is why the probability of this scenario, as terrible as it is, is non-trivial.
The Israel-Hamas war could turn into another proxy war between the two power blocks in the world.
Reports suggest that Hamas used North Korean weapons to attack Israel on Oct 7. China and Russia can step up supplies of weapons to Iran, Syria, Egypt, and the Gulf countries.
I argued in my video last week that Biden cannot escape the responsibility for the increased tension in the Middle East.
This week we have the Chinese foreign minister adding fat to fire talking about the long suffering of the Palestinian people and their legitimate right to an independent state.
I don’t know about you but to me, the hypocrisy of the Chinese leadership, given China’s position on Tibet and the Uyghurs, is just as unbearable as that of the American leadership.
Even more unbearable is the fact that the hypocrisy of superpowers can kill.
I would attach a probability of 30 percent to a regional war.
In this scenario, the big winners would be China and Russia. The big losers would be everyone else.
Scenario 3: Prolonged localized conflict
With a 10% chance of a ceasefire that preserves the status quo in Gaza and another 30% chance of a regional war, this leave a 60% chance to my central scenario which is a prolonged localized conflict.
Given the asymmetry of military resources at the disposal of the two sides, a prolonged localized conflict would inflict a high cost on Israel but would seriously incapacitate if not destroy Hamas all together.
In this scenario, the big winner would be the Palestinian authority that will see its formidable rival considerably weakened or even decimated.
This is also the result that the US is hoping for, since it views PA control of Gaza as a preliminary to the establishment of a Palestinian state.
That said, the PA is highly unpopular and viewed as deeply corrupt by the population of the West Bank. Whether it can survive until the end of the conflict cannot be taken for granted.
In this scenario, Iran would be a big loser while Saudi Arabia would be a winner.
The US would be a winner too as it would regain its influence in the Middle East.
The three scenarios I set out are not entirely independent. For example, a prolonged localized conflict could lead to a regional war or a ceasefire that leaves Hamas intact.
Also, I am assuming that all the players will follow their reaction functions as I understand them to be.
My prediction does not take into account the possibility of mistakes and accidents that will tend to increase the probability of Scenario 2.
Most importantly, I reserve the right to change my prediction as new data and information come in.