Yes, it's a classic case of good news, bad news. The good news is that the economy is recovering, which is exactly what it should be doing when energy prices drop. That means demand is up, so prices will rise. As long as they're below $3.50/gallon, we should be OK. In fact, if the economy recovers enough, then prices could go up to just below $4.00/gallon and the economy will still grow.
The bad news is that we could have another supply shock from the Middle East, this time from Iran. Take it away Dan Amira of New York Magazine.
We're not saying we're definitely going to war with Iran soon. But maybe start preparing yourself mentally, just in case, like when you sense something scary is about to happen in a horror film. For two days in a row now, Iran has threatened to use its military to cut off access to the Strait of Hormuz — a shipping route through which one-sixth of the world's oil passes as it leaves the Persian Gulf — if the United States follows through on new sanctions that recently passed in Congress. The U.S. Navy responded today that "any disruption will not be tolerated." Great.What I've been afraid of for the past four years would be that the United States would strike pre-emptively at Iran to take out their nuclear program. That hasn't happened. Instead, my worry now is that Iran will do something else to bait the U.S. and others into war. It looks like they're threatening to do just that. This action would run afoul of the Carter Doctrine as extended by Ronald Reagan, which has been the basis of U.S. policy in the Persian Gulf for more than 30 years.
Carter's successor, President Ronald Reagan, extended the policy in October 1981 with what is sometimes called the "Reagan Corollary to the Carter Doctrine", which proclaimed that the United States would intervene to protect Saudi Arabia, whose security was threatened after the outbreak of the Iran–Iraq War. Thus, while the Carter Doctrine warned away outside forces from the region, the Reagan Corollary pledged to secure internal stability.Should Iran actually follow through with this, especially before they succeed in building nuclear weapons, there will be war and the price of gas will go to $5.00/gallon. I don't know if Iran is so reckless as to invite the U.S., EU, Saudi Arabia, Kuwait, and who knows who else to beat up on them. That written, stranger things have happened, such as Manuel Noriega waving a machete on Panamanian television in 1989 and declaring that a state of war existed with the United States. That didn't work out too well for him.
*In an example of the exception proving the rule, I was interviewed by one of the TV stations in Bakersfield while I was filling up my car while visiting my then-girlfriend in early 1983 and asked about the price of gas, which had fallen to the lowest level in five years. I told them that as a consumer, I was happy about the low price of gas, but that I was no longer working because of the low price of oil. I told my girlfriend to watch the local news that night, as I would be out of town. Sure enough, my interview got on the air, as my soundbite gave them exactly the bad news angle they were looking for.