West’s pressure on Iran may squeeze U.S., too

Oil-price spike could crimp economy

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As tensions heat up between Iran and the West, the prospect of a big spike in oil prices to as high as $200 a barrel suddenly looms over the U.S. economy, threatening to overshadow what have been promising signs of gathering strength.

U.S. consumers have proved highly sensitive to the price of fuel, which shot up recently after Iran threatened to close the Strait of Hormuz — the only exit from the oil-rich Persian Gulf for one-fifth of the world’s oil exports.

At about $3.28 a gallon at the pump, regular gasoline prices are at record levels for this time of year and are likely to go up as demand rises in the months ahead. The renewed pressure on gas prices could prompt consumers who opened their wallets during the critical Christmas shopping season to pull back on spending, imperiling the economy as they did last year when high oil prices sent gasoline to uncomfortable levels close to $4 per gallon and nearly snuffed out economic growth.

Analysts generally think Iran is bluffing and is unlikely to risk a military confrontation with the U.S. by blocking the critical passageway for oil shipments — including those vital to Iran’s economy — but no one can rule out the possibility that Iran’s deeply anti-American rulers will make good on their threats.

“Closure would do far more damage to Iran in economic terms than the sanctions” the West is preparing to impose on Iran for refusing to abandon its nuclear ambitions, said Frank A. Verrastro, senior vice president at the Center for Strategic and International Studies.

By all accounts, Iran’s economy al ready is suffering greatly in anticipation of a round of sanctions that are the broadest ever to be imposed on Tehran. With the nation’s currency plummeting and causing financial and economic turmoil, Iran’s leaders have been casting about for ways to strike back at the West.

“Desperate nations driven to the brink sometimes do desperate and unpredictable things,” Mr. Verrastro said. “Even if short-lived, disruption to shipping in the Gulf would undoubtedly wreak havoc in oil markets.”

Energy analysts say premium crude prices would quickly double to $200 per barrel or higher if a military clash were to erupt in the Gulf. Such stultifyingly high prices, in turn, would deal a potentially devastating blow to the fragile economic recovery in the U.S. and likely throw Europe into a deep recession. The U.S. economy nearly came to a standstill in the wake of a much smaller oil shock last year caused by the Arab Spring uprisings across the Middle East.

“If the Straits of Hormuz close, oil will rise above $200 per barrel,” said Chris Faulkner, chief executive officer of Breitling Oil and Gas. “It’s the one bottleneck that allows Iran to choke the West’s oil supply.”

Other analysts point out that Iran has frequently threatened to hold the West hostage by closing the strait, without following through.

“This is the umpteenth time” Iran has made such a threat and it should be taken with a grain of salt once again, said Foreign Policy magazine columnist Michael A. Cohen. As in past episodes, the U.S. military is more than capable of overwhelming any attempts by Iran to follow through, he said.

Iran is at best a second-rate power, with an outdated and not terribly advanced conventional military force that is barely able to project power outside its borders,” he said.

Nevertheless, as Iran’s leaders are well aware, often the mere threat of a blockade suffices to drive up oil prices to threatening levels.

Analysts estimate that the current price of oil includes a “risk premium” of $20 to $40 a barrel because of the recurring instability in the Middle East.

Iran’s threat is credible enough that the International Energy Agency has made contingency plans to release millions of barrels of oil from storage wells in the U.S., Europe and Japan. The Obama administration last year joined in a small release of oil from the strategic reserves to counter shortfalls of Libyan oil in world markets. Iran exports 2.4 million barrels a day.

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