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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
Apr 7, 2012 8:32AM
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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.

Apr 7, 2012 8:29AM
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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.

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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 6:03AM
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It's called the American GREED!  It's the US who is causing havoc in the MIddle East!!  ALl those coutries who oppose the US.. starting with Iraq, Tunisia, Libya, Egypt and now Syria.. you will see Iran is next and the last!!   Saudia Arabia will never be harmed, they are our friends!!  US wants this ..a mess in the Middle East!   Manipulating the Americans, the gas prices!  Don't be fools!!  How can you predict gas prices unless you create a motive to drive the cause!  I wouldnt doubt if AL-Qaeda videos were filmed in your back yard! 
Apr 7, 2012 5:45AM
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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. 
Apr 7, 2012 4:37AM
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Higher fuel costs? Sounds like a plan right out of the Obama play book, the S O B told us during his campaign that energy rates would skyrocket under his plan. His plan to further destroy the United States.
Apr 7, 2012 3:51AM
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How about a revolution, I hear people talking all the time about one.
Apr 7, 2012 3:48AM
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@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 23, 2012 3:15PM
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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 10:32AM
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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.
Mar 23, 2012 10:19AM
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Do you really think the Israelis care if their closest ally suffers higher gas costs?  Despite all the nonsense about Iran proliferating nuclear technology, the much greater danger is the failed state of Pakistan, the lethal state that in fact does export nuclear technology and know-how to the highest bidder.  NO war.  Containment is possible, with crippling sanctions.  Right wing Israelis are fools, not making peace when Israel is comparatively strong.  Israel should cede settlements for a viable Palestinian state and build Israel's shining city on a hill.  Not waste time with paltry and illegal settlements.
Mar 23, 2012 10:09AM
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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.


Mar 23, 2012 10:06AM
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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.

Mar 23, 2012 10:00AM
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The U.S. and world governments, recognizing that $240/barrel oil would wreck economies, COULD finally do something about the speculators and lock prices for the duration of the emergency.  How much the oil companies control things in Banana Republic America would determine whether that WOULD happen.
Mar 23, 2012 7:07AM
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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 23, 2012 4:15AM
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SSSSSOOOOOOOOOO how did it get to where its at now , u may ask price ?  gas ?  price silly . all balderdash that ye write , none of ye know anything, or if ye do yer  not sayan look back , its this its that , it used to be the wind , an explosion , now the threat of war , those guys playan in the sand  the one one government and a bunch of rogues , thats the reason . but none of ye writers will give the real reason , i know you have a family to feed but pppllllleeeeaaasssee dont continue to feed us , all those lies
Mar 22, 2012 10:42PM
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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!
Mar 22, 2012 9:32PM
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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.
Mar 22, 2012 8:03PM
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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....
Mar 22, 2012 4:54PM
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"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." 

This is exactly what I fear.  I am not a professional psychologist but I find it very hard to imagine any leadership successfully pushing their populace down the road to a confrontation with the U.S.

If it comes to pass that a military conflict actually emerges, Iran would be unrecognizable for the next 100 years.  The history books would rewrite the facts about what has been considered the seat of Persian excellence.

Now, if you want to try to address the problem of radical Islamic reality and its attempts to politically control the world, conflict would be the way to go.  The sooner the better.

Personally, I think Iran's leadership (?) has miscalculated and will back down.  If not, then the enlightened west will oblige them with conflict like nothing they have or can imagine.  Sure it will be a hardship on the civilian population but it's about time we involved our civilian selves in this conflict about something so basic as the freedom to think and do non-Islamic things.  I'm ready to pay more for gas for the rest of my life and adjust my life's expectations if it will stop this Islamic madness.  Who's with me?
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