Risk 2: Middle East on the brink

On 30 September 2023, National Security Advisor Jake Sullivan said that “the Middle East is quieter today than it has been in two decades.” He jinxed it. Just eight days later, Hamas's terrorist attacks shook the region to its core, jolting the world out of its complacency on the Palestinian issue, shattering Israel's sense of security, and turning the Middle East into a powder keg.

To be sure, there's still a lot of truth to Sullivan's claim: Iran and the Gulf states are the closest they've been in years thanks to the China-brokered breakthrough between Riyadh and Tehran. Qatar and the Gulf Cooperation Council fixed their problems. The ceasefire in Yemen holds. Syria is back in the diplomatic loop. The Abraham Accords remain up and running. And yet … everybody forgot about the Palestinians.

Now, one thing is certain: The region is no longer quiet, and it won't be for ages. There is a network of deterrence relationships—Israel and the US on the one hand, Iran and its proxies on the other, and the Gulf states in between—that has so far contained the war to Gaza … just. No country wants a regional war to erupt. But the powder is dry, and the number of players carrying matches makes the risk of escalation high. The current fighting in Gaza is accordingly likely to be only the first phase in an expanding conflict in 2024. 

One path to escalation would be a decision by Israel to strike Hezbollah. Israel's post-7 October security posture is defined by a commitment to restore regional deterrence and address long-standing security risks, with a bias toward preempting threats before they materialize. Top Israeli leaders have pledged to “remove” the threat from Hezbollah on their northern border, and the war cabinet is debating an operation to push the militant group beyond the Litani river in southern Lebanon as called for by UN Security Council Resolution 1701. That would lead to a showdown with Hezbollah. Israeli Prime Minister Benjamin Netanyahu has his own reasons to keep the Gaza campaign going or start another one in the north: avoiding ouster and possible jail time (please see box in Top Risk #5).

If Israel were to attack preemptively, it would probably wait to do so until after the fighting ebbed in Gaza to avoid a full-fledged, two-front war (initial withdrawals of some Israeli troops from Gaza should be assessed accordingly). The US military would almost certainly provide support to the Israeli effort. Iran, in turn, would assist Hezbollah, the most important link in Tehran's power projection strategy in the Levant. A spiral of escalation could turn the shadow war between the US/Israel and Iran into a kinetic one.

A similar spiral could be initiated by Hezbollah with the backing of Iran if its leader, Hassan Nasrallah, thought the level of Palestinian casualties in Gaza—or the West Bank—had become intolerably high. And if Iran believed that Hezbollah was at risk of being existentially degraded, its level of support for the group would increase.


Houthi militants are also pursuing an escalatory path. The Yemen-based former rebels have a formidable arsenal of weapons supplied by Iran and are keen to boost their standing at home and within the Tehran-backed “Resistance Front.” They have a longer leash—but also less protection—from Tehran than Iran's other regional proxies, and they are more risk acceptant. The Houthis have been launching missile and drone attacks on Israel, US warships, and commercial shipping vessels since November, threatening safe passage through the Strait of Bab al Mandab and the Gulf of Aden—key transit waterways for oil and goods to Europe, North America, and Asia. In response, the US has formed a multinational naval task force to protect shipping and deter the Houthis. But the Yemeni group will remain undeterred and continue to shoot. In doing so, it could inadvertently kill US citizens, which would demand a stronger response from Washington. If the Houthis stay on this path, strikes on their bases in Yemen are increasingly likely, bringing the United States and its allies more directly into the war. 

Finally, Shia militias operating in Iraq and Syria have systematically increased their attacks on US bases, with Tehran's blessing but at least partially driven by local political dynamics. These attacks are difficult to deter, and the possibility of unintended consequences is rising accordingly. Risks associated with US casualties are particularly stark. Washington has made clear that any US deaths will lead to large-scale retaliation, and that Iran will be held directly accountable.

All these pathways pose risks to the global economy. Most of the world's largest shipping companies have already suspended transit through the Red Sea in response to the Houthi strikes, paralyzing a critical waterway that sees 12% of global trade pass through it. Ongoing Houthi attacks will keep freight insurance rates elevated, disrupt global supply chains, and create inflationary pressure. In addition, the closer the conflict comes to Iran, the greater the risk of disruptions to oil flows in both the Red Sea and the Persian Gulf, pushing crude prices higher. Any moves by Israel, the US, or others to block Iran's 1.4 million barrels per day of oil exports via sanctions or military strikes would provoke retaliation by Tehran that puts larger volumes of oil and LNG exports from the region at risk (though the worst-case scenario, a closure of the Strait of Hormuz, remains a very low probability).

The conflict will also widen existing global divisions and disrupt politics. Anti-Israel sentiment is inflamed across the Middle East, among Muslim populations around the world, and— increasingly—within the Global South. The United States is currently as isolated globally in its support for Israel as Russia was over its invasion of Ukraine. As the war in Gaza drags on, the schism between Washington and the rest of the world will grow.

Divisions will deepen within the US as well, where public opinion on Israel-Palestine is shifting with the nation's demographics. A majority of Gen Zers now view the 7 October attacks—the worst violence against Jews since the Holocaust—as justified. Discontent among young Americans, minorities, and progressives with President Joe Biden's steadfast backing of Israel will hurt Democrats in the 2024 election. 

The most dangerous schism, though, remains between Israelis and Palestinians. Israelis across the political spectrum overwhelmingly support the complete destruction of Hamas, whatever that means and however improbable it may be. A growing majority of Palestinians in the West Bank and Gaza, meanwhile, support Hamas. More temporary ceasefires to the current fighting in Gaza remain possible, especially given the strong international pressure behind them … but they're extremely unlikely to prove sustained. The longer the war goes on, the more both populations will radicalize. This will increase the risk of insurgency in Gaza, deadly clashes in the West Bank and Jerusalem, and terrorist attacks in Israel that provoke a further military response. It goes without saying that the expansion of Israeli-Palestinian violence makes the prospects for an eventual two-state solution increasingly dim.

Finally, and perhaps most troublingly, this conflict will stoke political and religious extremism across the Middle East and elsewhere. Demonstrations could erupt in Arab and Muslim countries as Israeli forces kill or displace larger numbers of Palestinian civilians in Gaza, or in response to settler violence and repression in the West Bank and Jerusalem. These upheavals could destabilize countries with large populations of Palestinian refugees such as Egypt and Jordan and—in the extreme—force their governments to cut ties with Israel. All along, Islamic terrorist groups will use images and casualty figures from Gaza as propaganda and recruitment tools, and violence against Jews will spike in many countries. Fatal violence linked to the war has already hit Europe, and the United States is also vulnerable.