Here we go again. Escalating tensions in the Middle East are once again wreaking havoc on global oil prices and as a result, American consumers are paying more at the pump than they probably should be otherwise.

Unlike last year however, popular uprisings and real supply disruptions are not the driving force at work here.  Sure, events in Syria have the makings for another protracted civil war, but the country is a small player on the world oil stage (pre-revolution Libyan production was about 4.5 times that of Syria).   

Instead, this year’s price spike is the result of concerns surrounding the world’s fifth largest oil producer Iran.

For well-known reasons, Iran’s nuclear ambitions have long been a concern for numerous other nations (Israel being the most prominent) and although Iran has publically refuted the assumption that their nuclear program was ultimately intended for the development of nuclear weapons, few have taken them at their word.  

To try and control matters, the U.S. and various other nations have imposed sanctions against Iran and have tried to keep tabs on Iranian progress by way of site visits from the UN’s nuclear watchdog the International Atomic Energy Agency (IAEA).

Despite these measures, Iran has pushed forward with its nuclear program undeterred and on numerous occasions – including over the past few months – has denied IAEA inspectors access to requested military sites.

The maturation of Iran’s nuclear capabilities and their continued refusals to allow in IAEA personnel instigated a new round of sanctions from the West over the past few months.  For their part, E.U. countries agreed to an embargo on Iranian oil back in January, but the ban was pushed off until July 1st to allow member countries ample time to find substitute suppliers of oil. 

Although the E.U.’s replacement demand of approximately 700,000 bpd of oil currently sourced from Iran combined with already taut supplies is enough to lead to higher oil prices, the extended summer deadline for implementation means any disruption to supply thus far has been minimal.

The real pressure is being applied by the threat of Israeli military action against Iranian military targets, which some believe stands a strong chance of occurring sometime over the next few months.  The U.S. though is counseling against this, preferring that Israel wait for the newly enacted sanctions to help drive Iran back into compliance.

Clearly this is a touchy situation, but as of right now oil and gas prices are being inflated more by the expectation that supply will be disrupted as opposed to any real loss in the amount of oil being produced.

Here in the States, gas prices have jumped by $0.46 since the end of last year and the average price of regular grade gas now stands $3.72 per gallon (fig).  From a seasonal perspective, prices historically rise by about 8 cents over the first two months of the year, which is mark we’ve blown past over the last two years. 

Speaking of 2011, prices through the first nine weeks of 2012 have been on average $0.32 higher than what was recorded over the same period of time last year.  If we apply this year’s premium to last year’s high point, one can roughly surmise that gas prices will top out at an average of around $4.30 per gallon sometime in May (fig).

Scary to be sure, but we don’t think prices will get quite this high – at least this year.  Here’s why -  

When the E.U. embargo does go into effect in July, Saudi Arabia has repeatedly promised to make up for any shortfalls in supply from fellow OPEC members on concerns that fledgling global demand will fall in reaction to an unreasonable spike in oil prices.
In addition, comments over the past few days by Iranian and U.S. officials, as well as by the IAEA, have seemingly been directed towards alleviating current tensions.

As a result, both Brent and West Texas Intermediate crude oil spot prices have steadily receded over the past few days, and oil futures are now more or less flat out to four months indicating that the market isn’t expecting any significant increases in the price of oil over this period of time.

Considering the above, we’re now forecasting that prices will top out in May somewhere around $4 per gallon, which is an estimate that is also in line with current gasoline futures contracts.

So what impact does $4 per gallon gasoline have on used vehicle prices today?  The short answer is not nearly as much as it used to.
If prices were to suddenly escalate from current levels to $4, we estimate that used compact car prices would increase by 1.7%, while prices for mid-size utilities would decline by -1%; both mild adjustments relative to what we’ve seen in years’ past.  

Gas prices would have to move deeper into previously unknown territory in order for used prices to change more dramatically.  For example, at $4.50 per gallon we estimate that prices for the two segments mentioned above would change by +6% and -6.4% respectively. 

At $5 things become more extreme – compact car prices would jump by over 10% while mid-size utility prices would fall by a whopping -16.5%; large SUV and pickup prices would fall on average by -20%.

So far we haven’t seen much of a reaction to this latest run up in fuel prices one way or the other.  In fact, prices for most segments – compact cars and large trucks alike – continued to trend upward in February as is seasonally expected. 

Although current signs suggest that gas prices won’t exceed previous highs by a significant degree, clearly this is an evolving story.  Let’s just hope that in the end cooler heads prevail and that sanctions preclude the need for military intervention.  Otherwise, our list of worries will most likely grow well beyond the rising cost of fuel.