The conventional wisdom following Israel's recent strikes on Iranian military facilities in retaliation for Iran's ballistic missile attack on Israel is that the risk of further escalation has been contained. Initial statements from the Islamic Republic's supreme leader suggested that Iran may not respond further, and financial markets seemed to agree, with oil prices falling 5% immediately after the Israeli strikes (even if they rose again somewhat following new bellicose statements by some Iranian military commanders).

But this conventional wisdom is likely wrong. Israel's assessment of the threat posed by Iran has shifted dramatically in the last few months. It is not just Prime Minister Binyamin Netanyahu and his right-wing allies' views that have hardened; key leaders of the center and center-left opposition - such as Benny Gantz and Yair Lapid - also argue that Israel should go further than it did with its recent strikes.

Whether or not one agrees with Israel's assessment, there is now a consensus there that the Iranian regime represents an immediate, clear, and present danger. With Iranian proxies - Hamas, Hezbollah, the Houthis, and Shia militias in Iraq and Syria - continuing to attack Israel, Israeli leaders have concluded that they must address the problem at its source. That could mean targeting Iranian nuclear facilities and eliminating the regime's top military and political leaders, as Israel has already done vis-à-vis Hamas and Hezbollah. By eliminating Hezbollah's top leadership and destroying a lot of its offensive capabilities, the Israelis have significantly eroded the deterrent leverage that Iran had over them.

Owing to this radical change in the relative balance of power, Iran has only one effective option left to deter Israel now that even its offensive missiles and other weapons have failed to cause meaningful damage: a dash to develop its nuclear weapons capability. But since Israel regards a nuclear-armed Iran as an existential threat, it would have no other option than to attack Iranian nuclear facilities (as well as the top Iranian leadership) before Iran builds a viable device.

Additional Israeli airstrikes are highly likely regardless of how much restraint Iran shows. While a victory for Donald Trump in the US presidential election may give Israel a clearer green light to go after Iran, a win for Kamala Harris may not be able to stop Israel from addressing what it perceives as an existential threat.

If Israel does start incrementally escalating its attacks on Iran, possibly following new Iranian attacks against Israel, any US administration would inevitably continue to support it, either directly or indirectly. Whether Israel has the capabilities to destroy most of Iran's nuclear program or precipitate regime change in Iran is irrelevant; even limited damage to Iran's nuclear facilities could set back its nuclear ambitions by a few years and establish the deterrence that Israel wants.

The likelihood of escalation in the coming weeks and months means that there will be economic and financial risks to manage. A large-enough Israeli strike on Iran could severely disrupt energy production and exports from the Gulf. If Iran gets desperate, it could try to mine the Gulf and block the Strait of Hormuz, while also striking Saudi oil facilities. In this scenario, the world would experience stagflationary shocks similar to those that followed the 1973 Yom Kippur War and the 1979 Iranian revolution.

Oil-price spikes would be a disaster for the global economy and the welfare of billions of people, and policymakers should be thinking about measures to soften the blow. It would help if a major conflict were as brief as possible. Israel would need to strike Iran extremely hard and with precision, rather than over the course of many months. Maritime minesweepers (of the kind that Japan operates) would need to be rapidly deployed to clear the Gulf as fast as possible.

Moreover, the United States would need to provide Saudi Arabia with advanced defense technologies - like additional Patriot antimissile systems - to minimize the risk of Iran destroying Saudi oil production and delivery facilities. And the Kingdom must massively increase its oil production and exports of its excess capacity to reduce any potential global price spike, while the US and other powers should use their strategic oil reserves to dampen the impact further.

Governments in advanced economies and emerging markets can also introduce temporary fiscal subsidies for energy consumers - like those that were implemented following the price spike after Russia's invasion of Ukraine in 2022. And central banks can respond to any stagflationary shock by holding policy rates steady or even reducing them. With inflation expectations well anchored (unlike in the 1970s), central banks must not overreact by tightening in response to a shock that should prove temporary (lasting a couple of months or so).

Of course, since a full-scale Israeli attack on Iran would be highly risky, a Harris administration would probably strongly advise against it. In addition to the global economic and financial fallout, a failure to destroy Iran's nuclear facilities would only reinforce the regime's decision to try to develop a weapon.

Success, however, could yield considerable dividends. The Iranian regime - a longstanding source of major instability in the Middle East - would be severely weakened; and if Iran is severely weakened, its proxies across the region will be, too. Indeed, one cannot rule out a grassroots revolution in Iran following large-scale Israeli attacks. The regime is already weak, unpopular, and resented by most Iranians. If it falls, that could improve the conditions for achieving a ceasefire in Gaza, Israeli-Saudi normalization, and eventually renewed talks toward a two-state solution for Israel-Palestine.

So, an Israeli attack against Iran is a high-risk, high-reward strategy that could lead either to a global economic disaster or to a reshaping of the Middle East for the better. That, at any rate, is how the Israelis see things, and further Iranian provocations against Israel are likely. Regardless of whether one agrees with their assessment, an escalation of the conflict is highly likely.

From Project Syndicate