Iran and Oil

When it comes to oil prices and the economy, I think it’s important to distinguish between high prices driven by surging demand and high prices driven by supply disruptions. Part of the story of recent increases is all demand, but part of it is concern about Middle East geopolitics and that side of things could get worse:

“If we get some kind of explosion — like an Israeli attack or some local Iranian revolutionary guard decides to take matters in his own hands and attacks a tanker — than we’d see oil prices push up 20 to 25 percent higher and another 50 cents a gallon at the pump,” said Michael C. Lynch, president of Strategic Energy and Economic Research.

But again my point would be that the issue with a supply disruption wouldn’t just be higher prices. If prices are driven higher by surging Brazilian demand for automobiles, then maybe Americans are getting work somewhere in that automotive supply chain. If prices are driven higher by surging Chinese demand for jet fuel, then maybe we’re building some of the jets. If prices are driven higher by things exploding in Iran or by a military confrontation in the Straights of Hormuz then there’s nothing on the other side of the equasion and the economic consequences are much worse.