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Ezrati’s Economic Outlook: Oil Prices Pose Biggest Threat

Iran tensions could push oil high enough to stall the recovery.

By Milton Ezrati | Updated on March 05, 2012
Right now the greatest threat to America’s economic recovery and to further market gains is the situation in the Persian Gulf. Absent this danger of higher crude and gasoline prices, investors can reasonably anticipate a durable, if plodding, economic recovery and modest relief from European debt fears now that the European Central Bank has adopted an easier monetary policy. It is, then, the potential economic fallout from higher oil prices, not to mention the shock of a military confrontation, that poses the biggest risk. If probabilities still favor some easing of tensions and so continued economic and market gains, the danger is significant enough to warrant serious attention.

It understates the current situation in the Persian Gulf—grossly so—to describe it as tense. Whatever quibbles emerge among the different intelligence sources, the basic contours are clear enough: Iran is on the verge of getting a nuclear weapon. It has already demonstrated rocket technology capable of delivering that weapon, by some estimates, as far as the United States but certainly as far as Europe and, of course, Israel. Tehran has stonewalled all efforts by the United States, the United Nations and the international community more loosely defined to discover where its program stands or what its intentions are. A sanctions regime, cobbled together by the United States and major European nations, seems to have hurt Iran, despite opposition from Russia and China. No doubt that pain has prompted the government in Tehran to invite renewed negotiations, though Iran’s past behavior leaves little reason to expect success. Military action from the United States, Israel, both of them or even, peremptorily, from Iran, remains a real threat.

Even now, well short of those extremes, the current level of tension and the threat it constitutes to ongoing oil flows have pushed up petroleum prices significantly. Since last fall, when the latest problems with Iran began to mount, the price of a barrel of oil (West Texas Intermediate) has risen more than 40%, from about $78 to about $110. The price of gasoline has risen almost as much, by 30%, from a national before-tax average of $2.40 a gallon to $3.12. Since according to the Labor Department, fuel of all kinds constitutes about 9.8% of the average American’s budget, this oil price rise has already siphoned more than $280 billion, or about 2.5%, from households’ other consumption options. That more than eats up, as the media widely indicated, the value of the payroll tax-cut extension Congress just recently passed and the President signed.

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