Iran Nuclear Crisis Drives Gas Prices

How high will gas prices go? That question seems to be on the minds of most Americans these days. It’s a question without a solid answer due to global insecurities over the Iranian nuclear crisis and won’t be resolved unless or until Iran backs down from its goal of obtaining a nuclear weapon.

In the meantime global sanctions against the Iranian regime are ratcheting up tensions and a July deadline issued by the European Union to ban the import of Iranian oil has been met with threats of closing the Strait of Hormuz. Analysts are warning that gas prices could double if Iran chose to close the strait, reducing global economic growth by as much as a third.

Iranian crisis sending gas prices skyward

While it’s unlikely that Iran could keep up a closure of the strait for long, IHS Global Insight, a global analysis firm, states that such a closure could last as long as 3 months. Closure of the strait by Iran would involve the laying of mines in the six-mile wide passage and would disrupt global oil supplies until the U.S. was able to find and remove the mines. More than 17 million barrels of oil a day pass through the strait, representing nearly 20% of the global oil market.

While crude oil prices have meandered around $108 a barrel level recently, closure of the strait could mean prices as high as $240 a barrel, according to a senior research director for IHS. If this happens we could be seeing gas as high as $8 a gallon until disruptions in the flow of oil through the strait were resolved.

IHS went on to say that even after a resumption in oil shipments through the strait crude oil would likely remain “as high as $160 a barrel” for some time before eventually settling in somewhere around $120, still well above current levels. IHS went on to warn that such an occurrence could bring back gas lines as we haven’t experienced since the Carter Administration and would cause global economic devastation .

Oil prices in excess of $200 a barrel would mean consumers would be hit with gas prices in the $8 per gallon range and would cripple the already frail U.S. and global economies.

Though closing the strait would present its own economic challenges to the Iranian regime, assuming the Iranian government would act in a rational way ignores historical facts. Nearly all acts of the current Iranian government, led by the man who had personal involvement in the crude oil crisis of the late ‘70s, would be considered irrational by all Western nations.

Further complicating matters is the likelihood that Israel will act before Iran can make enough fissile material and perfect a delivery vehicle. Some analysts predict Iran could reach that point before the end of this year, ramping up pressure on Israel to strike first. A large-scale Israeli attack would send crude oil futures skyward, though a quick resolution might lessen the period of greater than $200 a barrel prices, assuming a successful mission. In the face of such action the U.S. would almost certainly be drawn in to protect the flow of oil through the Persian Gulf.

Gas Price Forecasts Look Dismal

IHS’s recent stance on future crude oil supplies and prices was surprisingly more negative than many had anticipated and doesn’t comport with assessments by Moody’s Analytics.

But IHS disagrees with other assessments, stating that the impact would be so large because global oil supplies are so tight. The world has only between 1.8 million and 2.5 million barrels per day of unused production capacity, down from 6.2 million in 2009. Tight inventories magnify the impact of any interruption in crude from nations around the strait.

Eight dollar a gallon gas would have a major impact on nearly every sector of the economy. Despite the obvious effect on consumers’ abilities to move about, employers would be forced to trim staffs to compensate for ballooning transportation costs. Food prices would grow at levels not seen in our lifetimes. Analysts take a far less dismal view than logic would dictate failing to admit the likelihood of a global depression unlike anything ever experienced before.

Consumers could be faced with spending an extra $145 a month for gas before even taking into consideration inflation at levels many consider unspeakable.

Thirty-three years ago, amidst the gas crisis of the Carter years, legislators promised the U.S. would reach energy independence and the lone accomplishment of all the hand-wringing was the Strategic Oil Reserve. The reserve holds enough crude oil to supply about 60 days worth of gas to the U.S. market perhaps delaying temporarily reaching the $8 a gallon gas level; however the rebound effect when the reserve was emptied would an immediate spike potentially above $8.

The sole benefactor of such a crisis would likely be the electric car industry that the President so loves. Faced with $8 a gallon gas millions would be beating down the doors of the auto industry for alternatively fueled vehicles. Unfortunately when the fuel that drives the economy becomes scarce or priced exorbitantly high it will have a like effect on the fuels that produce electricity such as coal and natural gas. The demands on the electric grid would yield a new crisis of available electricity; the snowball effect times two.

It’s time for lawmakers to stop the partisan gamesmanship and step up to the plate. It’s too late to thwart the devastating effects of a full-on Iranian oil crisis, but we must not delay for one more day to address American energy independence.

The President is out on the campaign trail spreading half-truths about America’s oil reserves stating that we cannot reach energy independence through drilling because the U.S. has only two percent of the global oil reserves while consuming 20 percent. What the President fails to disclose is that this two percent is only the “proven” reserves and recent findings in the upper Midwest show that it likely that the U.S. has 10 to 20 times the reserves we believed only a few years ago. New technology that has been perfected over the past decade allows us to reach oil reserves that were never available before.

Newt Gingrich’s campaign slogan of $2.50 a gallon gas isn’t only achievable it’s probably a very conservative stance. Continuing on our current path not only foretells $8 a gallon gas, it almost insures it.

Drill-baby-drill. Then drill some more.