As Covert War Continues Against Iran, Market Expects Increased Chance of Overt Attack in 2012

On the heals of Iranian claims to have downed an American intelligence drone (story here), the nuclear prolifeation watchdog organization, the Institute for Science and International Security, an independent non-profit led by former United Nations nuclear inspector, David Albright, has provided satellite imagery evidence that the November 16, 2011 blast at an Iranian military base was more devasting than originally believed (see the original New York Times story here:  Iran Base Explosion).

And only a few days earlier, former Mossad chief,  Meir Dagan, said on Israeli television that an Israeli attack on Iran would be a "catastrophe" (see Haaretz.com story here:  Former Mossad Chief Dagan Speaks Out).  These events, in addition to reports over the past two years of assassinations of top Iranian nuclear scientists and computer virus attacks directed at the Iranian nuclear industry, have led more than a few media outlets to speculate that the war against Iran has already started (see Dec. 5th Atlantic article).  Whether these alleged covert activities are the actions of Israel, the United States, or some combination, is uncertain.  What is certain is Iran's closing in on a nuclear weapons capability that strikes fear into more than a few of its neighbors, not just Israel. 

On Intrade.com, contracts regarding the likelihood of a U.S or Israeli overt attack on Iran's nuclear capabilities are increasingly active and the prices (i.e., probability estimates) have significantly increased in the past few weeks.  Since late November, the Intrade.com market estimates that probability of an attack by June 30, 2012 has increased from 12 to 30 percent.  Trading is considerably lighter on this Intrade.com contract in comparison to the 2012 Republican nomination-related contracts; but, nonethless, these recent price movements are consistent with a much longer term upward trend in a number of a contracts related to the probability of an airstrike on Iran (see charts below).

The fact that a former Mossad chief would publicly denounce even the idea of an Israeli military strike suggests a dynamic and divisive debate is occurring between Israel's military and political leaders right now.  Former UN Ambassador John Bolton said last year, as Iran was installing fueling rods at its Bushehr nuclear plant, that the opportunity to effectively attack Iran's nuclear capabalities is slipping away.  But, a year and half later, on December 1st, Israeli Defense Minister Ehud Barak assured the world that an attack on Iran is still not imminent.  Bolton's war-mongering tendancies aside, the idea of an attack on Iran is clearly not absurd as both sides on the argument are organizing their forces to weigh in on this debate.  Whether the Intrade.com market is just reacting to this open source media chatter or to something more fundamental, only time will tell.  But I would suggest anyone who cares about peace and security in our times, pay close attention to these Intrade.com contracts over the next year.