The continued tensions over Iran?s nuclear development program and its influence on rising oil prices center around whether Israel will attack Iran?s nuclear facilities to prevent further development of a weapon. Some analysts are believing that an attack by Israel on Iran is becoming more of a certainty, even as high as 38.1% (over a 3 out of 8 chance), which is why the oil price, and hence, the gasoline price, is factoring this in of late.
Some risk-parity approach models are being applied to the scenario of Israel attacking Iran. This potential conflict with Iran could cause Iran to shut down oil traffic through the Straits of Hormuz, which could lead to a moderate rise in oil prices. The projected percentage increase would be 18%, essentially increasing the oil price from around $105 per barrel as it currently stands to around $124 per barrel.
However, if a larger scale conflict between Israel and Iran took place, one that involved many direct missile strikes and counterstrikes between the two countries, this would constitute a more severe scenario that could cause oil prices, and hence, gasoline prices, to really soar beyond their current high prices now. In fact, some risk-parity approach models estimate that oil prices would rise by 75% over their current levels, resulting in a price of $185 per barrel.
This would likely have a devastating effect on the U.S. economic recovery, as already there is debate over whether the United States should tap into its Strategic Oil Reserve to relieve gas prices that are hovering around $4.00 per gallon. Such an attack on Iran would easily cause gasoline prices to rise to levels that the United States has never seen before. Some say that the price of gasoline could reach $8.00 per gallon and beyond. That would certainly affect everything from retail sector ETFs (NYSEARCA:RTH, NYSEARCA:XRT, NYSEARCA:RETS, NYSEARCA:RETL, NYSEARCA:PMR) to other sectors of the stock market, since transportation costs and discretionary income would be negatively impacted to such a large degree.
If such a scenario with Iran would occur, President Obama would certainly tap into the United States? Strategic Oil Reserve to alleviate some of the price rise, but how long the very high gasoline prices would last would depend on how quickly the United States and its allies could take control of the Gulf Region. The quicker they took control, the quicker the gas prices would drop, but most projections indicate that it would take over a week to gain control of the Gulf, and some scenarios even have it taking nearly a month to gain control of the Gulf. The exorbitant gasoline prices lasting for that period of time would certainly cause catastrophic damage to the U.S. economy, damage that would likely not be overcome for a period of years, if not the better part of a decade.
In addition to the devastating economic impact on the recovering U.S. economy that an attack on Iran would have, former White House counterterrorism official Richard Clarke believes there would be more negative impacts on the American way of life in general. Clarke believes that there would be an increased alert of terror attacks occurring in U.S. cities, the potential for worldwide cyberwar that would attempt to take out nations? electric power grids, the deaths of numerous American sailors, and the potential for a long drawn-out military conflict against Iran.
Bottom Line: Israel attacking Iran would cause oil prices to rise, and thus, gasoline prices to rise, which would cause detrimental damage to the U.S. economy, the severity of which would depend on whether the Straits of Hormuz are cut off or if there is a long-drawn out military conflict with Iran.
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