Tensions in Middle East Fan Fears of Sharp Gas Price Hikes

Meg Handley

The average price for a gallon of gas is at record highs and analysts only expect it to get worse, fanning concerns that a big shock in fuel costs could derail the nation's fragile economic recovery.

Oil prices spiked Monday after Iran halted oil shipments to the U.K. and France in retaliation for recent sanctions imposed by the European Union and United States, adding to worries that gas prices--which have already seen a 29-cent jump since December--could be headed even higher. The highest gas prices on record were in July 2008 when prices hit $4.11 per gallon.

Pain at the pump is already a reality for some California residents who saw $5.04 per gallon-gas in Bolinas, Calif., over the President's Holiday weekend. Alaska and Hawaii have also reported gas prices breaching $4 a gallon.

Although price hikes in the neighborhood of 40 cents are typical for the months leading into spring as suppliers tweak fuel formulations to prepare for the summer months, the jump has been much more severe this year, primarily due to increasing tensions in the Middle East.

[Photo Gallery: Iran Flexes Military Muscle in Persian Gulf.]

"Given the current volatility we have right now, it's almost a perfect storm," says Gregg Laskoski, senior petroleum analyst for GasBuddy.com. "Under ordinary circumstances we would expect prices to climb incrementally from now through May. What's exacerbating that is the situation in the Middle East."

"It's becoming a very dangerous waiting game," Laskoski says, adding that the odds of an Israeli attack on Iran's nuclear facilities are "better than a 50-50 chance," according to some officials, and could happen any time between now and this summer. "That's created a tremendous amount of nervousness in the financial markets and a huge premium in the global price of crude oil."


Supply issues stateside have also had a hand in pushing up prices more than usual this time of year. Refinery closures in Pennsylvania have driven costs up and a recent fire at a major refinery in Washington has put the squeeze on consumers on the West coast.

In a worst case scenario, crude oil could surge to $200 a barrel, Laskoski says, which would add another $2.50 on top of current gas prices, hovering nationally at around $3.57 according to AAA's Daily Fuel Gauge Report. Do the math, and that could mean gas prices approaching $6 per gallon.

But don't start hyperventilating yet. There's still a lot of "ifs" in the equation, Laskoski says, and it would take something apocalyptic to actually see prices in that neighborhood, others say.

"You may indeed have to pay $5 [a gallon] if you buy your summer gasoline on a tropical island, Martha's Vineyard, or one of the tonier suburbs of New York, San Francisco, or Los Angeles," Tom Kloza, chief oil analyst at the Oil Price Information Service, wrote in a recent post. "But the chances of nationwide gasoline averages approaching $5 [a gallon] are about as good as having the Spice Girls perform a tribute to Demi Moore at the Oscars."

[Read: Will Gas Prices Grow to $5 a Gallon?]

In other words, not so likely.

Kloza does anticipate further increases in gas prices, but expects them to level out near $4.05 per gallon. The national average might hit that sooner than usual, he says--maybe in March or April instead of May--but aside from that, the upticks seen so far have been fairly typical.

"I cannot emphasize enough how tidal oil prices are, and typically there's always a high tide at the end of the 1st quarter, beginning of the 2nd quarter," Kloza says. "This year I think it will be an astronomical high tide, but it's been moved up a bit."

"We've seen this movie before, we know how it ends," Kloza adds. "It doesn't end with Mel Gibson as Mad Max riding through the countryside with gas tankers; it ends with prices peaking in the spring and then sometimes dropping back quite quick."


Twitter: @mmhandley

--Despite Inflation Forecast, Prices on Everyday Items Expected to Climb this Year.

--Dow breaks 13,000 for first time since '08 crisis.

-- Could High Gas Prices Hurt Obama's Reelection Campaign?