LONDON: A jump in energy prices is jamming the slow-turning cogs of an economic recovery in the West, but that may be nothing compared to the economic shock an Israeli attack on Iran would cause.
Oil rose to a 10-month high above $125 a barrel on Friday, prompting responses from policymakers around the world including U.S. President Barack Obama, watching U.S. gasoline prices follow crude to push towards $4 a gallon in an election year.
Europe may have more to fear as its fragile economic growth falters and Greece, Italy and Spain look for alternative sources to the crude they currently import from Iran, where an EU oil embargo, intended to make Iran abandon what the West fears are efforts to develop nuclear weapons, comes into force in June.
In euro terms, Brent crude rose to an all-time high of 93.60 euros this week, topping its 2008 record.
"The West's determination to prevent Iran acquiring nuclear weapons is coming at a price - a price that might include a second global recession triggered by an oil shock," said David Hufton from the oil brokerage PVM.
In dollar terms, oil prices are still some $20 a barrel short of their 2008 record of $147. But the latest Reuters monthly survey will on Monday show oil analysts revising up their predictions for Brent crude by $3 since the previous month.
Such a change is big in a poll of over 30 analysts, and last happened at the peak of the Libyan war in May.
Ian Taylor, head of the world's biggest oil trading house Vitol, told Reuters this week prices could spike as high as $150 a barrel if Iran's arch-enemy Israel launched a strike at its nuclear facilities - an option Israel has declined to rule out.
"I used to think this would never happen," Taylor said, "but everyone you speak to says the Israelis will have a go at striking at Iranian nuclear sites.
"The day that happens, you have to believe the Iranians throw a few mines in the Strait of Hormuz and, for a few hours at least or maybe more, I cannot see a scenario where prices would not be at that sort of level ($150)."
The U.N. nuclear watchdog said on Friday Iran had sharply stepped up its uranium enrichment, which Iran insists is solely for civilian purposes.
Israel has warned that, by putting much of its nuclear programme underground, Iran is approaching a "zone of immunity", but it has also said any decision to attack is "very far off".
Wall Street bank Merrill Lynch said this week that oil prices could climb to $200 over the next five years.
So far this year, dollar prices for Brent crude have risen by more than 15 percent, pushed up mainly by fears about Iran. The loss of supply from three small and mid-sized producers suffering internal turmoil - Syria, Yemen and South Sudan - has added to the supply worries.
WEAK GROWTH, HIGH PRICES
A stabilisation of the U.S. economy may explain some of the rise in oil prices, but the global economy is growing far more slowly now than at this time last year, yet crude prices are just as high.
World equities and oil have typically been closely correlated since 2008 because both were driven by global demand.
However, as oil prices start to respond to supply problems, the correlation is evaporating, and the global economy is already paying a high price.
Data published this week showed unexpectedly weak activity in Europe's most powerful economy, Germany, and in France, sparking fresh worries that the region could tip into recession.
Few have forgotten that in 2008, within six months of hitting its all-time high, oil plunged as low as $35 a barrel with the onset of the global credit crisis.
In the United States, demand for refined oil products is close to its lowest level in nearly 15 years, indicating that motorists are cutting back their mileage.
"The price spike is going to be a challenge for politicians in the West running for re-election," said Olivier Jakob from the Petromatrix consultancy.
He said developed countries would find it hard to justify a release of strategic oil stocks similar to what they did in 2011.
Unlike a year ago, when Libyan oil exports were disrupted by a war, this year "there is ... instead a voluntary restriction on buying from a specific country", said Jakob.
Other than a release of oil stocks, developed countries could resort to yet another round of monetary easing, to which emerging markets will respond with quantitative tightening, price controls and subsidies, said analysts from HSBC.
"In terms of fiscal health, it would seem that Asia is better placed than other regions to deal with an oil price shock," HSBC said in a note last week.