Why $4 Gas Will Hurt Less This Time

It's starting to seem like a spring ritual: Something goes pop in the Middle East, oil and gasoline prices surge, consumers get nervous, and the economy backslides.

Last year, the "Arab Spring" uprisings in Egypt, Libya, and several other countries pushed oil prices up by more than $20 per barrel, to a peak of about $113 in April. Gas prices hit the unnerving $4 per gallon level in May, depressing confidence and spending and triggering fears of a double-dip recession.

Now, Iran is the boogey man. Oil prices fell back below $80 per barrel in the second half of last year, as the Middle East settled down. But they're heading back up as the ongoing confrontation over Iran's nuclear weapons program intensifies. The United States and Europe are imposing a modified boycott of Iranian oil, to pressure Iran to curtail its quest for nuclear weapons. Some analysts predict a pre-emptive U.S. or Israeli military attack on Iran this year. If that happens, Iran could retaliate by attempting to shut down the Strait of Hormuz, a key oil chokepoint, or taking other measures that cause turmoil throughout the Middle East.

Those worries have produced a new "fear premium" on oil prices, which are heading back toward $110 per barrel. If shooting breaks out in Iran, prices could spike to $150 or even $200 per barrel, at least for a while. Gas prices have already risen by about 30 cents this year, to an average of about $3.65 per gallon. Since seasonal factors usually push prices up by 25 cents or so in the spring and summer, pump prices seem headed for $4 once again—and possibly $5 or even $6, if bombs fly. Read more........