The Axis of Conflict: A Comprehensive Study on Israel's Conflicts with Neighboring Countries, Confrontation with Iran, and the Impact on the Global Economy
Executive Summary
This report provides an in-depth analysis of the complex conflict structure in the Middle East that has persisted since the founding of Israel in 1948. The report traces the evolution of the conflict from traditional interstate wars with Arab nations over territory (1948-1973) to the rise of asymmetric warfare, non-state actors, and an ideological and hegemonic rivalry between Israel and Iran. The four major Arab-Israeli wars, from the 1948 War of Independence to the 1973 Yom Kippur War, established Israel's military superiority and entrenched the Palestinian refugee problem. The 1973 war, in particular, triggered the first oil shock, in which Arab oil-producing nations weaponized oil, demonstrating that Middle Eastern conflicts could directly impact the global economy.
The 1979 Islamic Revolution in Iran fundamentally altered the geopolitics of the Middle East. Iran, once a strategic ally of Israel, transformed into its most hostile adversary, establishing an 'Axis of Resistance' that supports proxy forces like Hezbollah and Hamas, and engaging in a 'shadow war' and direct military confrontations with Israel. Iran's nuclear development program serves as the central flashpoint in this conflict, pushing both nations to the brink of all-out war.
These conflicts, from the oil shocks of the 1970s to the current threats of a Strait of Hormuz blockade and instability in the Red Sea shipping lanes, have been a persistent source of global economic instability. By comprehensively examining the historical roots and progression of these conflicts, as well as their multifaceted impact on the international economy, this report aims to provide a deep understanding of the contemporary situation in the Middle East.
Part 1: The Origins of the Conflict: The 1948 War and the Shaping of the Middle East
This chapter establishes that the Arab-Israeli conflict was not a spontaneous event but the cumulative result of decades of clashing nationalist aspirations, imperial-era policies, and demographic shifts.
1.1 The Seeds of Discord: The British Mandate and Competing Nationalisms
The roots of the conflict can be traced to the mutually contradictory promises made by Great Britain during World War I to serve its own strategic interests. Britain simultaneously pursued the
McMahon-Hussein Correspondence (1915), which promised independence to the Arabs in exchange for fighting against the Ottoman Empire, and the Balfour Declaration (1917), which supported the establishment of a "national home for the Jewish people" in Palestine. This was a product of a classic 'divide and rule' policy that prioritized British imperial interests over regional realities.
Concurrently, Zionism emerged as a political movement in Europe, and Jewish immigration to Palestine surged throughout the 1920s and 30s as people fled anti-Semitism. This led to heightened tensions and frequent violent clashes with the existing Arab population.
In this process, the conflict originated not from an asymmetry of power, but from an asymmetry of political organization and international support. The Zionist movement was a highly organized political body with considerable influence in Western capitals. In contrast, the Palestinian Arab community, which constituted the majority of the population, was politically fragmented and lacked the unified leadership to effectively navigate the post-World War I international order. While the Balfour Declaration itself was a political victory demonstrating the Zionist organization's ability to influence great powers, Arab resistance was localized and lacked a coherent international diplomatic strategy. This initial political imbalance meant that when the issue was passed to the United Nations, the framework for discussion was already tilted towards a two-state solution based on partition. This was a concept the Zionist leadership was prepared to accept, but which the Arab leadership rejected.
1.2 The 1947 UN Partition Plan and the 1948 Arab-Israeli War (War of Independence)
Unable to resolve the escalating violence, Britain handed over its mandate to the newly formed United Nations. The UN Special Committee on Palestine proposed Resolution 181, which recommended partitioning Palestine into Arab and Jewish states, with Jerusalem under international administration. The Jewish leadership accepted the plan, but the Arab League and Palestinian leaders rejected it, viewing it as an illegal division of their territory by external powers.
On May 14, 1948, as the British Mandate expired, David Ben-Gurion declared the establishment of the State of Israel. The very next day, May 15, a coalition of Arab armies from Egypt, Jordan, Syria, Lebanon, and Iraq invaded, sparking the first Arab-Israeli War.
1.3 The Outcome and Enduring Legacy: Israel's Victory and the Palestinian 'Nakba'
Despite being outnumbered initially, the Israeli forces were better organized, highly motivated, and bolstered their military strength with clandestinely acquired weapons as the war progressed. In contrast, the Arab armies lacked a unified strategy and failed to conduct coordinated operations, often acting on their respective national interests.
By the time armistice agreements were signed in 1949, Israel had not only secured its survival but had also expanded its control to about 78% of Mandatory Palestine, significantly more than what the UN Partition Plan had allocated. The war created a massive refugee crisis. Approximately 726,000 Palestinian Arabs were displaced or fled from their homes, an event known in the Arab world as the 'Nakba' or 'catastrophe'. This event remains central to Palestinian national identity and is the basis for the 'right of return' claim to this day. The remaining territories of the proposed Arab state were occupied by Egypt (the Gaza Strip) and Jordan (the West Bank and East Jerusalem), effectively erasing 'Palestine' from the map for the next two decades.
Part 2: A Cold War Flashpoint: The Major Arab-Israeli Wars (1956-1973)
This chapter analyzes the subsequent three wars within the context of the Cold War, where the United States and the Soviet Union used the regional conflict as a proxy battleground. This period marked a shift in the core of the conflict from a struggle for survival to the issue of occupied territories, and saw the birth of a new form of struggle: economic warfare.
2.1 The 1956 Suez Crisis (Second Arab-Israeli War)
The primary cause of the war was Egyptian President Gamal Abdel Nasser's nationalization of the Suez Canal, a vital waterway in which Britain and France had significant interests.
Israel invaded the Sinai Peninsula, followed swiftly by British and French airstrikes and landings. However, the operation ended in a political disaster. Immense pressure from an unusual concert of the United States and the Soviet Union forced the three armies to withdraw.
The Suez Crisis was a decisive turning point, marking the end of British and French influence in the Middle East and the beginning of American and Soviet dominance. Britain and France acted on an outdated imperial mindset, believing they could unilaterally impose their will. However, the Eisenhower administration in the U.S. opposed the intervention, fearing it would push the entire Arab world into the Soviet sphere of influence and destabilize global oil markets. The fact that the U.S. forced its traditional allies to back down through economic pressure (threatening the British pound) made it clear that Washington, not London or Paris, was now the ultimate arbiter of power in the region. This event solidified the U.S.-Soviet bipolar system in the Middle East, with the U.S. gradually becoming Israel's main patron and the Soviet Union backing key Arab states like Egypt and Syria.
2.2 The 1967 Six-Day War (Third Arab-Israeli War)
Escalating tensions, including Nasser's remilitarization of the Sinai, a renewed blockade of the Straits of Tiran, and the expulsion of UN peacekeepers, provided Israel with a casus belli. Convinced that an Arab attack was imminent, Israel launched a massive preemptive airstrike on June 5, 1967, destroying the bulk of the Egyptian, Syrian, and Jordanian air forces on the ground within hours. This was the decisive action that determined the war's outcome.
In just six days, Israel achieved a stunning military victory, capturing the Gaza Strip and the Sinai Peninsula from Egypt, the West Bank and East Jerusalem from Jordan, and the Golan Heights from Syria. This result fundamentally changed the nature of the conflict. The core issue was no longer simply Israel's existence, but the fate of the occupied Arab territories and the more than one million Palestinians living there. The UN Security Council adopted Resolution 242, which called for Israel's withdrawal from occupied territories in exchange for peace and secure borders, but differing interpretations by the parties involved made it a stumbling block in all subsequent peace negotiations.
2.3 The 1973 Yom Kippur War (Fourth Arab-Israeli War)
To reclaim lost territory and restore national pride, Egypt (under Nasser's successor, Anwar Sadat) and Syria launched a surprise coordinated attack on October 6, 1973, on Yom Kippur, the holiest day in Judaism.
Caught by surprise, Israel regrouped with the help of a massive U.S. airlift. The Israeli Defense Forces (IDF) managed to repel the Syrian forces and cross the Suez Canal, encircling the Egyptian Third Army.
The most significant and long-lasting consequence of the 1973 war was not military but economic. For the first time, the Organization of Arab Petroleum Exporting Countries (OAPEC) used the 'oil weapon,' directly linking the Middle East conflict to the global economy. During the war, OAPEC declared an oil embargo against the United States and other countries supporting Israel. Simultaneously, it cut production, creating a massive supply shock. This demonstrated that the Arab world possessed a powerful non-military tool to exert pressure on the West. The result was the First Oil Shock, which quadrupled world oil prices and plunged the industrialized world into a prolonged period of 'stagflation' (stagnation combined with inflation).
Table 1: Overview of the Four Major Arab-Israeli Wars
War (Period) | Main Causes | Key Combatants | Major Outcomes & Impacts |
1948 War (War of Independence) | UN Partition Plan, Israeli statehood | Israel vs. Egypt, Jordan, Syria, Iraq, Lebanon | Israeli victory, territorial expansion, Palestinian 'Nakba' |
1956 Suez Crisis | Nationalization of Suez Canal, Tiran Strait blockade | Israel, UK, France vs. Egypt | Political failure for UK/France, rise of US/Soviet influence, UN peacekeepers deployed |
1967 Six-Day War | Re-blockade of Tiran Strait, preemptive strike doctrine | Israel vs. Egypt, Syria, Jordan | Decisive Israeli victory, occupation of Sinai, Gaza, West Bank, Golan, UN Res. 242 |
1973 Yom Kippur War | Attempt to reclaim occupied territories | Israel vs. Egypt, Syria | Military stalemate, political victory for Egypt, Camp David Accords, First Oil Shock |
Part 3: The Great Shift: The Israeli-Iranian Conflict
This chapter details the most significant geopolitical realignment in the modern Middle East: the transformation of the relationship between Israel and Iran from a strategic alliance to an existential rivalry that defines the region's primary fault line.
3.1 The Pahlavi Dynasty Era: An Unlikely Alliance (Pre-1979)
In stark contrast to today's reality, pre-revolutionary Iran under Shah Mohammad Reza Pahlavi was one of Israel's closest allies in the region. Iran was the second Muslim-majority country to recognize Israel as a state.
The cooperation between the two countries was deep and multifaceted:
Economic: Israel was a major importer of Iranian oil, which was transported from the Persian Gulf to Israel's Red Sea port of Eilat, bypassing the hostile Suez Canal. The two countries even operated a joint oil pipeline company.
Military and Intelligence: Their intelligence agencies (Mossad and SAVAK) shared information. Most significantly, they embarked on a joint military venture, 'Project Flower,' to develop a long-range ballistic missile capable of carrying a nuclear warhead. This level of military trust is unimaginable today.
3.2 The 1979 Islamic Revolution: A Geopolitical Rupture
The fall of the Pahlavi dynasty and the rise of Ayatollah Ruhollah Khomeini immediately and completely reversed the relationship. Khomeini's ideology was built on the twin pillars of Islamic theocracy and anti-imperialism. In this worldview, the United States was the 'Great Satan,' and its key ally, Israel, was branded the
'Little Satan'—an illegitimate colonial entity and an 'enemy of Islam'. Iran immediately severed all diplomatic and economic ties, closed the Israeli embassy in Tehran and handed it over to the Palestine Liberation Organization (PLO), and made anti-Zionism a core tenet of its foreign policy.
3.3 The Era of Proxy Wars: Iran's 'Axis of Resistance'
Lacking a shared border and being inferior in conventional military power, Iran adopted a strategy of asymmetric proxy warfare to challenge Israel. This involved funding, training, and arming a network of regional non-state actors known as the 'Axis of Resistance.'
Hezbollah (Lebanon): The crown jewel of Iran's proxy network. Founded by Iran's Islamic Revolutionary Guard Corps (IRGC) in the 1980s, Hezbollah is a powerful Shia political and military organization that effectively controls southern Lebanon and possesses a vast arsenal of rockets and missiles aimed at Israel.
Hamas & Palestinian Islamic Jihad (PIJ): Despite being a Sunni organization, Hamas became a key recipient of Iranian support due to its unwavering commitment to armed struggle against Israel. This demonstrates that Iran's anti-Israel strategy can be pragmatic, transcending the Shia-Sunni sectarian divide. Iran provides support in several ways:
Funding: Estimated to be between $70 million and $100 million annually, delivered through a complex network of cryptocurrencies, shell companies, and cash smuggling.
Weapons and Technology Transfer: Iran has smuggled advanced rockets like the Fajr-5 into Gaza and, more importantly, has provided the technical expertise that allows Hamas to produce its own rockets using everyday materials. This has enabled Hamas to build a massive indigenous arsenal.
Training: The Quds Force, the IRGC's elite unit, has trained hundreds of Hamas and PIJ fighters in advanced combat techniques in Iran and other locations.
Other Proxies: Iran also supports the Houthi rebels in Yemen and various Shia militias in Iraq and Syria, creating a 'ring of fire' that can threaten Israel and its interests on multiple fronts.
3.4 The Shadow War and Direct Confrontation
The central driver of the modern conflict is Iran's nuclear program. Israel views a nuclear-armed Iran as an existential threat and has vowed to prevent it at all costs. This has led to a long-running 'shadow war' characterized by:
Israeli Covert Operations: These include assassinations of Iranian nuclear scientists, cyberattacks like the Stuxnet virus that targeted uranium enrichment centrifuges, and sabotage of Iranian military and nuclear facilities.
Iranian Retaliation: This has involved attacks on Israeli-linked shipping and support for terrorist attacks on Israeli and Jewish targets abroad, such as the bombings in Argentina in the 1990s.
In 2024, the rules of engagement shifted dramatically. An Israeli airstrike on the Iranian consulate in Damascus, Syria, which killed senior IRGC commanders, crossed a red line. In retaliation, Iran launched an unprecedented direct attack, firing hundreds of missiles and drones from Iranian territory toward Israel. Although most were intercepted, this was the first-ever direct attack from Iranian soil. Israel responded with its own strikes on military targets inside Iran.
This intense hostility forms a kind of 'hostile symbiosis,' serving domestic political purposes for both regimes. For Israeli leadership, particularly right-wing governments, the existential threat of Iran is a powerful tool to rally the public, justify massive defense spending, and divert attention from domestic issues or the Palestinian conflict. For the Iranian theocracy, the permanent conflict with the 'Little Satan' reinforces its revolutionary legitimacy, justifies the power of the IRGC, and provides a scapegoat for economic failures. It is a cornerstone of their identity. This dynamic creates a dangerous feedback loop where each side's aggressive posture justifies the other's, pushing them toward an all-out war that neither truly wants but is politically useful to prepare for.
Table 2: Timeline of Israel-Iran Relations
Year | Key Event |
1950 | Iran becomes the second Muslim-majority country to recognize Israel |
1950s-70s | 'Periphery doctrine' alliance; close cooperation in oil, intelligence, and military R&D (Project Flower) |
1979 | Islamic Revolution in Iran. Khomeini designates Israel the 'Little Satan.' All ties are severed |
1982 | Iran's IRGC establishes Hezbollah in Lebanon, beginning the proxy war strategy |
1990s | Iran increases support for Hamas/PIJ; supports international terror attacks (e.g., in Argentina) |
2000s | Iran's nuclear program becomes public, posing an existential threat to Israel |
2010s | 'Shadow war' intensifies with Israeli cyberattacks (Stuxnet) and assassinations, and Iranian attacks on shipping |
2024 | Open conflict erupts with direct missile and drone attacks between Iran and Israel |
Part 4: The Economic Battlefield: Oil Shocks and Supply Chain Vulnerability
This final chapter analyzes the profound and lasting impact of Middle East conflicts on the international economy, showing how the economic battlefield has evolved from oil embargoes to modern threats against global trade infrastructure.
4.1 The First Oil Shock (1973): The Emergence of the Oil Weapon
As a direct consequence of the Yom Kippur War, the Organization of Arab Petroleum Exporting Countries (OAPEC) imposed an oil embargo on the United States, the Netherlands, and other Israeli allies. This, combined with production cuts, caused crude oil prices to quadruple in just a few months, from about $3 per barrel to nearly $12.
The impact on the global economy was catastrophic. It triggered a severe recession in the Western world and gave rise to a new economic malady: 'stagflation,' a combination of high unemployment and high inflation that could not be solved by traditional Keynesian economic remedies. For the United States, the shock was a primary catalyst for the severe 'stagflation' of the 1970s. The U.S. economy, which had grown increasingly dependent on foreign oil, was acutely strained. Inflation, which was already a concern, surged dramatically, with the Consumer Price Index (CPI) hitting 12% in 1974. The economy fell into a deep recession, and unemployment rose from under 5% in 1973 to 9% by 1975, a level not seen in decades.
4.2 The Second Oil Shock (1979): A Recurrence of Revolution and Shock
The Iranian Revolution caused the second major supply disruption. As chaos engulfed the nation, Iran's oil production collapsed, removing millions of barrels of crude from the world market. Panic buying in the spot market drove prices to unprecedented levels, eventually approaching nearly $40 per barrel (over $150 in today's value).
This second shock compounded the economic pain of the first, leading to another global recession. This second shock plunged the U.S. economy into another severe recession in 1980, which was exacerbated by the Federal Reserve's aggressive anti-inflationary policies. Under Chairman Paul Volcker, the Fed raised interest rates dramatically to combat runaway inflation, which peaked at 13.5% in 1980. While this "Volcker Shock" eventually broke the back of inflation, the monetary contraction pushed unemployment to a peak of 10.8% by late 1982, the highest level since the Great Depression.
The oil shocks of the 1970s were not just temporary economic events; they forced permanent structural changes in global energy consumption, policy, and economic thought. The extreme price hikes made energy efficiency a top economic and security priority for the first time, leading to the development of smaller, more fuel-efficient cars, improved insulation standards, and efficient industrial processes. They also spurred massive investment in non-OPEC oil exploration (e.g., North Sea, Alaska, Mexico) and alternative energy sources, which ultimately diversified global supply and weakened OPEC's price-setting power. Western nations established the International Energy Agency (IEA) and created Strategic Petroleum Reserves (SPR) to buffer against future supply shocks. In terms of monetary policy, the painful experience of stagflation taught central banks a crucial lesson. The failure of inconsistent policies and the relative success of consistent anti-inflationary policies, like Germany's, paved the way for the rise of independent, inflation-targeting central banks in the following decades.
4.3 Modern Economic Warfare: Chokepoints and Supply Chains
The modern economic threat has evolved. While the likelihood of a full-scale embargo has decreased, the focus has shifted to disrupting key maritime chokepoints.
Strait of Hormuz: This narrow strait is the world's most important oil transit chokepoint. About one-fifth of the world's total oil consumption passes through it daily. Iran has repeatedly threatened to close the strait in response to military pressure. A full or partial closure of the strait would cause oil prices to skyrocket. JPMorgan has projected that oil prices could surge to
$120-$130 per barrel. While the U.S. is less directly dependent on Gulf oil today than in the 1970s, a closure would still have severe consequences through global market turbulence and the impact on allied economies. A major disruption could intensify inflationary pressures in the U.S., potentially reversing trends of cooling consumer prices and impacting consumers directly at the wallet.
Global Supply Chain Disruption: The impact of conflict now extends far beyond energy. When the Houthi rebels, an Iranian proxy, began attacking commercial vessels in the Red Sea, major shipping companies were forced to reroute around Africa, dramatically increasing transit times and costs for all types of goods. This demonstrates how a regional conflict can now inflict direct pain on global supply chains, fuel inflation, and create logistical bottlenecks for industries worldwide.
Table 3: Economic Impact of the 1st and 2nd Oil Shocks
Indicator | 1972 (Pre-Shock) | 1974 (1st Shock Peak) | 1978 (Inter-Shock) | 1980 (2nd Shock Peak) |
Average Crude Oil Price ($/barrel) | $1.90 | $10.41 | $12.70 | $36.83 (1981) |
World Economic Growth Rate (%) | 5.6 | 1.9 | 4.3 | 1.4 |
OECD CPI Inflation Rate (%) | 4.7 | 13.4 | 10.2 | 13.2 (1979) |
U.S. Economic Growth Rate (%) | N/A | Recession | N/A | Recession |
U.S. CPI Inflation Rate (%) | N/A | ~12.0% | ~7.0% | 13.5% |
U.S. Unemployment Rate (%) | N/A | Rose to 9.0% (by 1975) | ~7.4% (in 1977) | Rose toward 10.8% (by 1982) |
Conclusion: An Evolving, Unresolved Conflict
To summarize the analysis of this report, the conflict between Israel and its neighbors has evolved from conventional Arab-Israeli wars to the current Iran-centric proxy and ideological warfare. Although the actors and methods have changed, the region remains a key flashpoint capable of simultaneously triggering devastating regional wars and severe global economic crises. The nature of the conflict began with direct clashes with Arab states over Israel's founding and territory, and was reshaped after the 1979 Iranian Revolution into a long-term confrontation between Israel and Iran over ideology and hegemony.
While past conflicts revolved around clear political agendas like the issue of occupied territories and the establishment of a Palestinian state, the current conflict is unfolding in a more complex and dangerous manner, characterized by Iran's nuclear development, asymmetric threats through proxy forces, and Israel's military responses. This modern conflict directly threatens key points in the global supply chain, such as the Strait of Hormuz and the Red Sea, giving it the potential to have an immediate and widespread impact on the world economy in a different way than the oil shocks of the 1970s.
Therefore, any solution for future stability in the region must not only address the territorial disputes of the past but also tackle the deep-seated ideological animosity and hegemonic competition that define the present to achieve any meaningful progress.
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