Aside from all the other good points people have mentioned, I should point out that Israel is not capable of launching an all-out war against the Arab states.
Israel can defend itself against anyone. It is militarily superior to its neighbors. HOWEVER, It has a relatively small full-time armed force. The vast bulk of its military manpower comes from the citizen reserves. Israel has had to mobilize its citizen army just to deal with the Palestinians.
The result of having a large reserve among the population is that large military mobilizations are hellishly expensive, because it takes productive people out of the economy.
Is Israel going occupy Syria? Saudi Arabia? Jordan? Lebanon? All of them? With what? Israel’s army is designed for rapid mobilization, fighting a short war, and then de-mobilizing. It’s brilliant at that. But those strengths make it a pretty poor occupying force. Israel is already feeling the economic strain from its latest mobilizations. Having to field a million soldiers in neighboring countries would stretch its defenses to the breaking point and ruin its economy.
So forget that scenario. It’s not in the cards, even if it were the right thing to do (and it’s not). Like it or not, Israel is going to have to figure out a way to live with its neighbors.
Part of the problem right now is that Sept. 11 and Al Qaida has stirred up a lot of latent militancy in the Arab world. It’s starting to polarize. The Saudi government could fall all on its own, and be replaced by something worse. Iraq is a continual problem. As long as this nonsense continues, so will the increase in terrorism in Israel.
Israel needs to buy time, hope for the situation to calm down, and *selectively hit targets that disrupt the enemy’s ability to organize and launch large terror attacks. It will just have to put up with the small ones.
Eventually, the situation will change. Either the U.S. will invade Iraq and install a friendly government, which will take the pressure off the Israelis to some degree, or the whole Arab world house of cards will crumble, leading to widespread change in a reasonably short period of time (years, not decades).
Looking a little further out, OPEC is losing its power, and will eventually be marginalized as other oil sources and alternatives to oil become available. Once the money stops flowing, A) the Saudis won’t have the money to fund as much terror, and B) no one will care what happens there anymore anyhow. Conflicts in the area wil, instead of being world-shaking events, will be more like the trouble in the Balkans - troubling, but not a threat to the world economy or anything.
These factors will slowly change the equation, hopefully for the better. Israel will just have to ride it out.