Smart SpendingSmart Spending

How war with Iran would cause $7 gas

A new forecast predicts panicky consumers and perhaps even 1970s-style gas lines.

By MSN Money Partner Mar 22, 2012 7:17AM

This post comes from Rick Newman at partner site U.S. News & World Report.

 

USNews.com on MSN MoneyIf gas prices are still close to $4 per gallon when Election Day rolls around, President Barack Obama will face tough political odds. But Obama -- or his successor -- could end up with a far worse problem than that in the not-too-distant future.

 

Forecasting firm IHS Global Insight has run a detailed scenario on how a war with Iran would affect oil prices and the global economy, with disconcerting takeaways for anybody sensitive to oil and gas prices -- including politicians.

 

The forecast says that if a military campaign over Iran's nuclear program prompted Tehran to lay mines in an attempt to shut down the Strait of Hormuz, Brent crude prices could soar from current levels of about $125 per barrel to a peak of roughly $240. Gas prices would rise by the same magnitude -- pushing them above $7 per gallon.

 

In the model, oil and gas prices probably wouldn't stay at those levels for long. Any major disruption of oil markets by Iran would likely bring a rapid and overwhelming response by the U.S. military, including attacks by ships and aircraft already stationed around the Persian Gulf. IHS predicts U.S. forces would probably be able to reopen the Strait of Hormuz, the world's most important oil chokepoint, in four weeks or less. But it would still take months for oil prices to settle back down to normal levels, while consumers and businesses grappled with collateral damage to their finances.

 

Most economists estimate that the threat of confrontation with Iran has already pushed oil prices up by about $20 per barrel. In the United States, gas prices have risen by nearly 55 cents per gallon so far this year to a national average of $3.88. In addition to hurting consumers, that impacts investors, speculators and business leaders, who are all intently focused on oil prices and where they might be heading. (Post continues below.)

In its scenario, IHS assumed that Iran will use mines, missiles and small-boat swarming tactics to shut down the Strait of Hormuz, through which about 20% of the world's traded oil flows every day. That could come in response to a U.S. or Israeli pre-emptive attack on Iran's nuclear facilities, but Iran could also make such an aggressive move on its own.

 

"Iran's leaders have done things that we expect rational leaders to avoid doing," Farid Abolfathi of IHS told clients in a recent presentation. "They might miscalculate or misjudge their chances of success."

 

Even though the model predicts U.S. forces could probably reopen the strait fairly quickly, it might still take a while to completely defeat Iran. Mines are notoriously tricky to clear and some could lurk undetected, threatening tankers for months. Iranian submarines and small attack boats could hide amid a large fleet of civilian fishing vessels in dozens of villages and island harbors, mounting follow-up attacks on tankers and U.S. ships.

 

The forecast also says that if oil were to rise to more than $200 a barrel, it could induce panicky consumer behavior, such as drivers topping off their gas tanks regularly out of fear that gasoline might run out. Lines at gas stations reminiscent of the 1970s could reappear. Pump prices would rise in line with oil prices, and stock markets could easily fall by 10% or 20%, possibly spurring a new recession.

 

IHS goes on to predict there would also be urgent efforts to relieve the supply crunch, such as a generous release of oil from emergency reserves in the United States and Europe. Saudi Arabia would be pressured to tap all the spare capacity it has and export as much as possible via pipelines that run to the Red Sea. Many nations would institute rationing schemes and strict conservation measures.

 

Those actions, combined with the rollback of the Iranian military, would bring oil prices down to an average of about $160 per barrel for three months or so, then back to around $120, IHS believes. So the whole affair might rattle markets for six months or so, and perhaps end with something like a return to the status quo.

 

If it were to happen, the timing could upend U.S. politics. A war with Iran in the fall, leading up to the elections, would intensify the financial pain soaring gas prices have on the typical American family, with gas costing a household an extra $100 per month or more. But a surge of patriotism might offset that, electorally speaking, helping Obama more than it hurts him.

 

IHS assume that its scenario takes place at the beginning of 2013, which would saddle the U.S. president with one more tough and complex problem at the same time that momentous decisions about tax cuts (or hikes) need to be made, and big cuts in federal spending are due to kick in. Wriggling out of a recession under that blend of economic pressures would be an impressive Houdini act for whoever is president in 2013.

 

There's one other scenario, of course: Some kind of diplomatic resolution that avoids a military confrontation and pushes oil prices down instead of up. That would mean politics as usual, which is ugly enough. But the politicians, at least, would have one less thing to argue about.

 

More on U.S. News & World Report and MSN Money:

 

47Comments
Mar 22, 2012 12:57PM
avatar
Leave fear and guilt to the bible. Iran doesn't even have a nuke. If Iran started anything they would be toast and everyone kkows it.
Mar 23, 2012 3:15PM
avatar
The problem is, that extra $100 per household doesn't stop at the pump. That will likely mean another $250+ out of pocket for food and other necessities that will inflate sharply due to the cost of freight and manufacturing. I'm "in" with relatives and friends in housing authority, banking, repo's, sales, construction, and no one is relaying anything to me that says anything is getting better. Gas needs to get under $3/gallon or the failure of our economy could be mere months away.
Mar 23, 2012 10:09AM
avatar
Going to war in Iran would be just as stupid as the unfunded Iraq war.  In fact, it would be even costlier in terms of lives and money. The only reason Iran is relevant is because of our insatiable demand for oil.

The real answer is to achieve energy independence, which has been our stated goal since the Nixon administration.  Drill, baby, drill is a joke.  Higher prices naturally lead to more exploration, but oil companies really don't want lower prices, so they intentionally limit supply.  The ultimate answer is to conserve more, convert trucks and buses from diesel to natural gas, greater use of solar and wind power, and moving toward hydrogen powered cars.  High prices are bad, because they hurt the economy and empower countries like Iran.  However, without high prices we may never seriously explore alternatives to oil.  Don't expect our politicians to be of any help, because they are incapable of  thinking beyond the next election.


Apr 7, 2012 8:38AM
avatar

When do you people get it? No matter how much of a supply the US has and we do have over 350 million barrels in reserve, Big Oil WILL increase prices. These stupids don't get it. They think their Big Big Rich Rich Texas BS has to be the law of the land. Says whom?

 

For the last 3 years, Big Oil has lost market share by at least 11%. Hurts their big double sized hinnies. Living large is what they've grown all too accustomed to on the backs of consumers who are now showing them the other side of the coin.

 

Why would anyone spend another dime to give Big Oil Big Daddies another round of obscene profits? For the last three years in one single fiscal quarter, Big Oil earned a 10-year record profit. How the hell did they do that if not by jacking prices 3 times a year?

 

You want to be hostages? Stick with Big Oil. If you like to keep money in your own pockets....get with the times..and they aren't beholden to Big Oil. You are already paying for 1 massive big oil spill...when BP gets around to another Big Oil Big Daddy Republican president, you'll pay for half of that Gulf spill too. Wake up for Pete's sake. You get zapped at the gas pumps, get zapped for the cost of their tax subsidies in the billions and again when they dump the cost of their spills on you. What more proof does anyone need then that it's long past time to seek out other forms of energy? Life doesn't revolve around Big Oil.

Mar 23, 2012 7:07AM
avatar
Lets face it....our government is not longer for the people.... why do you think the middle class is getting smaller ??  We are over taxed, over worked so that government and check drawers have the good life. When YOUR PRESIDENTS HEALTH CARE PLAN KICKS IN... THE GOVERNMENT WILL HAVE ACCESS TO YOUR BANK ACCOUNTS AND YOUR MONEY TO DETERMINE IF YOU ARE WORTH THE HEALTH CARE NEEDED TO SAVE YOUR LIFE.... YOU TELL ME... WITH THIS GOING ON WHY WORRY ABOUT GAS OR ANYTHING ELSE??  THIS COUNTRY HAS LET ONE MAN DESTROY EVERYTHING THIS COUNTRY EVER WAS.... GAS CAN BE MADE FROM COAL FOR 1.23 A GALLON... HITLER DID THIS.... WHY CANT WE ???  I SAW A BUMPER STICKER THE OTHER DAY THAT SAYS IT ALL FOR ME....  2012 DON'T RE-NIG...  DON'T WORRY IM NOT AND HOPE OTHERS WONT EITHER..
Mar 22, 2012 8:03PM
avatar
Go ahead and raise it to 7 bucks a gallon, my new scooter gets 110 MPG Im using 20 Bucks a month in gas now, and the sales of these are skyrocketing along with Motor cycles, soon cars will be giant hunks of metal to be sold for scrap, ill not be a victim to this world GLOBALIST SCAM.....Smart cars and Scootwers and Carts will replace Cars, Bread and milk will be 7 dollars a Gal/Loaf as trucks are squeezed but soon theyll all be LNG powered, How will the OIL Companys then scam the public once weve all moved to fuel efficient vehicles, WARS wont be a good enough scare tactic, nuclear attacks either, threats from Iran or the Three Stooges wont matter, its time people left behind the TERROR Scams, and just bought better more fuel efficient vehicles now, Cycles generally get 60 MPG....
Apr 7, 2012 10:17AM
avatar
We don't NEED Middle East oil. We have enough oil under North Dakota and Montana (Bakken formation and another under that) that has enough oil for the US for the next 120 years which should give us enough time to perfect alternative fuel sources.
Apr 7, 2012 10:15AM
avatar
This article is worthless. What exactly does it tell us that we couldn't predict already?

We already know that if a fly happens to sit on an oil refinery, prices will double, because nowadays anything and everything causes oil prices to go up. We already know that the major oil companies are a cartel. We already know that they would stomp on their own family's neck if it would bring them only a cent more in profit.

We need to cut oil consumption everywhere we can. Not because we can't afford it, but simply because we can.

Mar 23, 2012 10:32AM
avatar
Why are you even bringing this up.  It sounds like MSNBC wants prices to go up too.  Sounds like they are heavily invested in oil stocks.  Let's put the fear out there.
Apr 7, 2012 8:29AM
avatar

America needs to do the same thing with Iran that you do with the little drunk guy with the beer muscles at the party.

1: Politely remind him that you are twice his size and can break him like a twig.

*problem persists*

2: Short left, hard right, follow up if necessary. Go back to conversation as if nothing happened.

*In some cases, the guy just doesnt know when to quit*

3: Bring down the wrath of the almighty, deliver a religion changing beatdown that ensures that this man will NEVER try to pick another fight so long as he lives.

Translation to military terms.....

1: Listen up Iranian people, this has gone far enough and if change doesnt come BIG changes are coming.

2: Obliterate one major government/military shared center, Obama is seen vacationing in Hawaii.

3: Sheet of glass........ No extended occupations, no hunt for this guy and that guy.

 

Comparison to party example. If people dont wanna see a fight they get the beer muscled little prat under control. Real world translation. If the people in Iran want to keep breathing air they need to get their government under control.

 

We have the weapons to do these things with little cost/loss of life on our side.Is it the most moral thing to do......no. But sometimes people just cant be reasoned with and its time to take things to a whole new level.

Mar 22, 2012 9:32PM
avatar
Oil prices dropped $2+ dollars Wednesday  Gas prices went up today??? put Washington politicians on unemployment in November . Vote ouit incumbents  Don't be stupid enough to buy their lies any longer.
Apr 7, 2012 8:53AM
avatar
Yes we can make gas out of coal. But the problem is back in 1977 another goofball was in the whitehouse and decided that he would stop all future refineries from being built. Yes Petrobras is now using the rigs that were once in the gulf of mexico drilling off of Brazil. My point is if we did this gas prices would drop and it wouldnt matter if a war started in Iran we would not be affected. Oh yeah keystone pipeline would of dropped it too. Isnt it strange the party that claims they are for the people are screwing the people. Isnt it also strange that how dems claim the republicans want to hurt everyone. Personally I dont trust any of them. All in washington have forgotten that usa is a government that is to work for us not we work for them. I say I don't care how good you think your rep is I SAY VOTE ALL OF THEM  OUT and start over. If the president can only be in office for 4 years I say 6 years for all of them.10 years for those old farts in the supreme court not until they either died or they are so old they forgot they are a judge. Get real do you really think that anyone in washington really knows what it is like to be a true American?
Apr 7, 2012 3:48AM
avatar

@Joe

 

This is a pro Obummer site I would guess they would want what Obummer wants.  We are getting ripped off by congress and Obummer.  I'm sure none of them have to worry about fulling up their tanks or how much food is going to go up.  They don't worry about chit, the only worry they have is making more money and their own personal agendas.  Most seniors are at poverty levels and all congress and the new media talk about is cutting "entitlements", why don't they call it what it is social security.  Bunch of friggin jerks.

Mar 22, 2012 10:42PM
avatar
I invented a new vehicle that does not use gas, it has an aluminium frame with 2 wheels and is powered by your body. It is callllll wait for it !!!!  a bicycle.  If you can use it to go to work you are golden!
avatar
The price of gasoline was $1.84 when Obama took office. It is now approaching $5 per gallon. With the amount of gasoline Americans use, that's an additional $240 Billion per year out of the family budgets ($2.4 Trillion over 10 years).

If you think families are struggling now under Obama, just wait until this starts to hit home in higher utility and food bills.

Congratulations on that "Change we can believe in" that you voted for.
Apr 7, 2012 3:51AM
avatar
How about a revolution, I hear people talking all the time about one.
Apr 7, 2012 8:44AM
avatar

Refineries in the northeast are closing because of the drop in consumption. What does that tell you? It tells me that more Americans are getting smart and saving a bundle by converting to alternative energy. Of course, now Big Oil uses the closing of those refineries as the excuse to jack prices. If toilet paper went through the roof on pricing, Big Oil would find some excuse to get in on that deal too.

 

Any excuse to jack oil prices is never too much for Big Oil. These people are the biggest liars in this country. What they want is a monopoly industry that controls all life across the nation. And isn't that nearly where they are already? Look at the fear in the righties who dump the blame for Big Oil Big Daddies conniving and thieving on the president.

 

Meanwhile, all those Big Oil Big Daddies are laughing at the most gullible bunch of Americans to come down the pike yet. All while they lavish themselves with billions they can only earn by holding too gullible Americans hostage. Why not just hand over your paychecks to them? That way they can manage your entire lives for you.

Apr 7, 2012 8:32AM
avatar

Wow...More Texas BS Big Oil spin, spin, spin....and they actually expect us to believe it? Of course Big Oil will increase the price of oil. But, and here's the big butt....it has ZERO to do with Iran and everything to do with Big Oil taking a huge hit from consumers who are converting to alternative energy.

 

One solar company in NJ has 18,000 customers. Who'd pay Big Oil prices when there are now a ton of options? Another NJ company is selling biofuel and is picking quite a market share of the diesel business Big Oil USED to own.

 

Wah wah wah...that's all you hear from Big Oil. Now that they got the Republicans to hand over another $4 billion to their bank accounts courtesy of taxpayers, they do have to find yet another way to scam the public. Big Oil BS BS BS.

Mar 23, 2012 10:06AM
avatar

IMO there is only one way to hedge against oil prices going up........invest in oil stocks. If the price of oil goes up your stock value increases. Oh! I forgot you don't have money to invest because you have been living beyond your means buying those Apple toys and Starbuck drinks.

Apr 7, 2012 5:45AM
avatar
Obama  , The President sold on green energy  gave Brasil 2 billion and then told the world we would take all the oil they could sell to  us.
 Now with the price going to Hell we are worried about Iran closing the straights of Hormus.  Fat chance  drop an A Bomb on Tehran and stop all this Bull, wipe them out and keep the rest in check for a long time. Best yet Drop Pig Fat from the sky on all the arab countries. 
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

ABOUT SMART SPENDING

Smart Spending brings you the best money-saving tips from MSN Money and the rest of the Web. Join the conversation on Facebook and follow us on Twitter.

VIDEO ON MSN MONEY

TOOLS

More