By Alexander Bolton - 02/23/12 03:55 PM EST
A military strike by Israel against Iran’s nuclear facilities has emerged as one of the biggest threats to the U.S. economic recovery and could roil the November elections.
The Obama administration and economic experts have warned a pre-emptive attack by Israel could send the economy into a slump, which would change the trajectory of campaigns for the White House and Congress.
“If Iran is to retaliate against Israel or other U.S. targets, it’s really unpredictable. It’s safe to say there would be a big shock to oil prices,” said Adam Hersh, an economist at the Center for American Progress.
“The oil price shock and domestic politics in the United States are my biggest concerns for disrupting the economic recovery we’ve been seeing,” he said.
Tensions with Iran will serve as a backdrop for the emerging battle over energy policy between the White House and congressional Republicans, who are seizing on high gas prices to build political momentum.
It will also set the tone for a meeting early next month between President Obama and Israeli prime minister Benjamin Netanyahu.
Obama’s poll numbers have gone up with the economy, the chief concern of voters heading into the November election, and any news that would change that trajectory is unwanted at the White House.
Administration officials have acknowledged the dangers to national security and the economy from an Israel-Iran battle.
In November, Defense Secretary Leon Panetta warned an attack would damage the nation’s economic recovery. Panetta recently warned The Washington Post’s David Ignatius there is a strong likelihood Israel would strike in April, May or June, before Iran can shield its facilities from aerial bombing.
At the same time, there is only so much the United States can do in counseling Israel against taking action, and the Obama administration also wants to prevent Iran from gaining nuclear weapons.
Axel Merk, president of Merk Investments, based in Palo Alto, Calif., said a military conflict will cause oil prices to rise and “high energy prices will cause headwinds” for the national economic recovery.
He said regional conflict would shake investor confidence and risk aversion and predicted that could push the Federal Reserve to unleash a third round of quantitative easing.
Sarah Emerson, president of Energy Security Analysis Inc., an independent research firm, said the attack itself would not affect global oil supply but warned of Iran’s response.
She noted that 15 percent to 20 percent of the world’s oil output is shipped through the Strait of Hormuz, a narrow channel on Iran’s border. It’s an even higher percentage of the oil in transit between countries.
While Iran could not seize control of the strait indefinitely, it could effectively shut down traffic for weeks until the U.S. Navy could establish safe passage.
“I don’t think it can do anything but increase oil prices,” she said.
But Emerson said the economic impact of an oil shock would not be as severe as was experienced after the Iraqi invasion of Kuwait and the oil embargo.
“We don’t use oil in many parts of the U.S. economy anymore. Virtually none is used in electricity and heating,” she said.
While transportation, including airline, train and shipping traffic, still depends on oil to fuel it, she believes the nation can lower its consumption by changing travel habits.
The nation is also better positioned to soften the economic blow by tapping the Strategic Petroleum Reserve, which did not exist in the late '70s and which the president was reluctant to tap in the 1990s.
“Now we have bigger reserves and we’re much more willing to use them because there’s not as much spare capacity as we used to have,” she said, predicting an announcement to release oil from the reserve would come “within days if there was a problem with the strait.”
The White House has been encouraged by a rising stock market, which could improve the confidence of consumers seeing the balance of their retirement funds rise.
Daniel Alpert, managing partner of Westwood Capital, based in New York City, said an Israeli attack “would be disruptive to oil prices” and that the stock market had not priced in that possibility.
But Alpert said military action would not necessarily send the cost of energy soaring.
“If someone drops heavy ordnance on Iran, it’s going to send the world into a highly concerned state but it’s not going to necessarily justify oil prices hitting new highs,” he said.
Alpert believes excess liquidity caused by the European Central Bank’s effort to avert a credit crisis is an equally notable factor pushing up oil prices.
“You’re starting to see oil prices go up again. I think what we’re going to see is a redux of what we saw last year at this time,” he said.
Alpert said the Fed’s monetary stimulus last year, known as QE2, sent up the prices of commodities, which inhibited economic growth.
He said that is a reason he doubts the Fed will embark on a third round of quantitative easing in the months ahead.