Worried About $6 Gas Prices? Try $8

With oil prices remaining stubbornly above the $100 per barrel mark for WTIC, calls for $6 gas in the U.S. as a consequence of an attack on Iran may turn out to be arather conservative, maybe even a low-ball estimate.

According to Bloomberg, the average price paid at the pump has recently jumped above $4, again, with the charts suggesting a breakout to test the all-time high of $4.50 set in May 2011 is pennies away.  And the month of March still has more than a week left. 

“Bloomberg’s U.S. Average Gasoline price index, we are now back above $4 per gallon for the first time since May 2011,” Zerohedge.com reported.  “We also note that the average price for a gallon of gas across the EU is inching ever closer to the $10 mark.”

Loose monetary policies among G-8 member nations, Peak Oil, and Persian Gulf tension—which have now begun escalating to the highest threat of military action since the 1980-88 Iran/Iraq War—have conspired to lift gas prices to levels which may appear high, today.   But $105 WTIC and $4 gasoline may, in retrospect, turn to fading memories of the ‘good old days’ some economists speculate.

In late February, economist, author and money manager Stephen Leeb told King World News he expects a record gas price this summer.  The author of Red Alert said the oil market has entered the perfect storm.

“March is now on the way, and we are seeing very high prices for gasoline at the pump,” Leeb told KWN in a Feb. 22 interview.  “ . . . we are continuing to see higher prices for gasoline and it may even hit record highs.  In fact, I think they will hit record highs and we will see a minimum of $6 per gallon gasoline in the United States this summer.”

Leeb cites China’s decision to loosen monetary policy as well as tight oil supplies in the oil patch as the basis for his expectations.

But a military conflict with Iran could throw Leeb’s $6 price target far off the mark, as approximately 17 percent of the world’s oil supply could be shut out for, not a matter of weeks as the Pentagon has estimated, but months, according to Caitlin Talmadge, fellow at the John M. Olin Institute for Strategic Studies at Harvard University.

Talmadge stated in her article, entitled, Closing Time: Assessing the Iranian Threat to the Strait of Hormuz, Iran possess the capabilities of mining the Strait of Hormuz with nearly 1,000 mines or more, as well as achieving the capacity to attack U.S. mine countermeasure (MCM) ships with land-based, anti-ship cruise missiles (ASCAMs).

According to Talmadge, before the U.S. could embark on a dangerous mine-clearing mission, it first must conduct an aerial “hunt” for Iran’s ASCAMs, a hunt which “could add days, weeks, or even months” in addition to the time needed to clear the Strait.

“Iran possesses a larger stockpile of missiles and mines ten times as powerful as those used in the tanker wars of the 1980s, the last period of sustained naval conflict in the gulf,” she explained.  “If Iran managed to lay even a relatively small number of these mines in the strait, the United States certainly would act to clear the area. But the experience of past mine-warfare campaigns suggests that it could take many weeks, even months, to restore the full flow of commerce, and more time still for the oil markets to be convinced that stability had returned.”

CEO of Sprott Assett Management USA Rick Rule told KWN on Tuesday that he believes an attack on Iran could take oil to levels beyond $150 per barrel WTIC, much beyond.  According to Rule, “there is virtually no limit to the upside for oil prices. The oil price could easily double.”

Moreover, oil trading above $200 per barrel could easily take gasoline to $8 in the U.S., as a panic to secure already-tight global supplies could shock the American people into another significant downturn in the U.S. economy, more Fed monetary stimulus in response to the crisis, as well as technical support at much higher oil prices, irrespective of the eventual opening of the Strait of Hormuz possibly months into the future.

Insurers of carriers of crude may take an additional time period before becoming comfortable writing insurance on the oil tankers within the region.

In that grim scenario, Leeb said in his Feb. 22 KWN interview, “This could turn into really tough times.”

And added, “Because the economy will be struggling in that environment, we could see QE3 in the midst of already record high gasoline prices.  Now that will be wildly inflationary.”