In an article in The Jewish Journal, Associate Professor of Economics Tom Drennen discussed the impact of the tensions between Israel and Iran on U.S. gas prices. The article noted that conflict between the two countries is already impacting prices at the pump. An outright war between the two countries would have severe impact on oil production, distribution and pricing. “The whole notion that if something happened and Iran was willing to shut down the straits, that would send prices who knows where,” Drennen is quoted as saying. He agreed that talk of attacks has already had impact on the market, something which the U.S. government is well aware of, as evidenced by recent moves to tone down the rhetoric. The full text of the article appears below.
The Jewish Journal “Israel-Iran war talk blamed for oil price frenzy ” By Ron Kampeas • July 7, 2008 WASHINGTON (JTA)—Even if the tough talk between Israel and Iran never comes to blows, it’s already hitting consumers where it hurts—at the gas pump. Experts say that talk of an Israeli strike on Iran is a key part of what’s unsettling already volatile oil markets. “It’s clearly having an effect on oil markets as they continue their march upward,” said Tom Drennen, an oil markets expert at Hobart and William Smith Colleges in upstate New York. Oil prices soared to a record high of more than $144 a barrel last Wednesday after Iranian Foreign Minister Manouchehr Mottaki suggested to the United Nations that Iran would hit back in the event of an Israeli strike. And after Israeli Transportation Minister Shaul Mofaz said last month that an Israeli strike would be “inevitable” if Iran develops a nuclear bomb, oil prices had their highest single-day jump in history. Mofaz, a former chief of staff of the Israel Defense Forces, is also the chief negotiator in the U.S.-Israel strategic dialogue. Some pointed to his pronouncements as evidence that his Bush administration interlocutors view such a possibility positively, but others downplayed Mofaz’s remarks as indeliberate blustering. Even if it’s all just talk, the problem for consumers is that this intensified speculation drives the markets. “Traders on the floor look out into forward months, and when there’s a factor that will disrupt supplies, they will lock supplies a bit further out,” said David Pomfrey, the deputy director for energy and national security at the independent Center for Strategic and International Studies. Securing supplies ahead of time keeps oil off the market, driving up prices. Market fluctuation is more common in markets driven primarily by rumors and speculation rather than facts, Pomfrey said. “It’s a network of people whispering to each other,” he said. Speculators are now asking whether an Israeli strike on Iran would be limited to nuclear targets or if Israel would try to hit other sites as part of its attack strategy. For example, if Iran’s ports were damaged, the Islamic Republic’s major oil trading partners, such as China, might suffer. That likely would prompt a run on other markets. Then there’s the question of the Iranian response. “Would they try to use the leverage they have to cut off their oil flows into the world markets?” Pomfrey asked. “It would cost them, but it does allow them to impose penalties.” The nightmare scenario would be if Iran used its regional military superiority to shut down the Straits of Hormuz, a key passage for oil tankers. That would cut supplies from the other major producers, including Saudi Arabia, Kuwait and the Persian Gulf emirates. “The whole notion that if something happened and Iran was willing to shut down the straits, that would send prices who knows where,” Drennen said. Experts say the effect of tensions with Iran should not be overstated. Unrest within Nigeria, another major oil supplier, also was a major factor in driving up prices. “It’s hard to even tell” what the major factor is, said Michael O’Hanlon, a specialist in U.S. national security policy at the Brookings Institution. “The market is so easily spooked, it’s hard to separate anything from the noise.” In recent weeks, speculation that Israel might strike Iran in the diplomatic dead zone between the U.S. election on Nov. 7 and the presidential inauguration on Jan. 21 has intensified in Washington. That timing would give Israel a chance to get backing for a strike from President Bush, a staunch defender of Israel’s right to a pre-emptive defense, as well as spare the incoming president the difficulty of explaining such an attack. The effect on markets of attack talk likely was a factor in this week’s effort by U.S. officials to tone down the rhetoric, Drennen said. Bush, for instance, said Wednesday that he had made it clear to Israel that diplomacy was still the preferred option with Iran. And Adm. Mike Mullen, the chairman of the U.S. Joint Chiefs of Staff, warned of the dire consequences of an Israeli strike. “The U.S. would be thinking very seriously that they would be very careful about what they say in public,” Drennen said. “Any notion that they are considering such a move or Israel is considering such a move will have an affect. Every $2 increase in a barrel of oil means another five cents at the pump, and I’m not sure how much more consumers are going to take.”