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The Real Oil Shock

An Iran with nuclear weapons is the true threat to the world economy.

Jan 16, 2012, Vol. 17, No. 17 • By MICHAEL MAKOVSKY AND LAWRENCE GOLDSTEIN
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Consider first the potential consequences of a nuclear Iran. It could set off a proliferation cascade across the Middle East, with Saudi Arabia leading the way in acquiring nuclear capability. Iran would also be in a position to transfer nuclear materials to its terrorist allies. Further, Iran would seek to dominate the energy-rich Persian Gulf emirates and the Organization of Petroleum Exporting Countries (OPEC), threaten Israel’s existence, destabilize moderate Arab regimes, subvert U.S. efforts in Iraq and Afghanistan, embolden radicals, violently oppose the Middle East peace process, and increase support for terrorism and proxy warfare across the region. Former undersecretary of defense Eric Edelman, Andrew F. Krepinevich Jr., and Evan Braden Montgomery argued in Foreign Affairs that Israel and Iran could each have incentives to strike the other first with nuclear weapons. Similarly, Ambassador Dennis Ross, who recently served as a senior Mideast official in the Obama White House, explained that in such a situation the “potential for miscalculation” would be “enormous.” It is likely that some sort of conflict could emerge in the region involving both nuclear powers, which could drag in the United States. The U.S. position in the region, including the perception of its ability to secure the Strait of Hormuz, would plummet. 

All these potential consequences would heighten risks for the secure and sufficient supply of oil from the Persian Gulf, made worse by rising Iranian strength in OPEC and the need of major energy-importing countries, primarily in Asia, to deal delicately with Iran. The result would be a long-term rise in oil, gasoline, and heating fuel prices that would have serious negative implications for the fragile U.S. economy. Oil prices reflect many factors, including transit costs, current supply, projected future supply, and demand. Transit costs in turn include insurance premiums, which vary with the chance that vessels could be damaged or lost. The political risk to delivery is another factor; even without nuclear weapons Iran already has raised oil prices by threatening to close the Strait of Hormuz. In short, supply and transit projections reflect consideration of risks, and such risks would be tremendously heightened if Iran developed nuclear weapons. To begin to assess the economic consequences, consider that roughly every $10 rise in annual oil prices produces a nearly 0.5 percent decline in U.S. gross domestic product. 

It is impossible to predict how the Iranian crisis will play out. The most desirable but least likely scenario is an elegant resolution that inflicts no short-term economic sacrifice on the United States. If the crisis gets resolved through tough sanctions or military action, the economic pain could be significant but relatively short-lived. The worst prospect both strategically and economically is a nuclear-armed Iran. The United States needs to prevent that from developing for both security and economic reasons. 

Michael Makovsky, a former oil analyst at investment firms, is director of the National Security Project at the Bipartisan Policy Center and author of Churchill’s Promised Land.
Lawrence Goldstein is a founder of the Energy Policy Research Foundation and former consultant to the office of the secretary
of defense.

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