SALT LAKE CITY -- When gas prices go up significantly, people feel pain at the pump. Some people get angry; others are forced to choose what they'll have to go without. Americans are used to cheap energy. Freedom of mobility is a part of the U.S. national psyche. This is an issue that affects everyone, but it's not always easy to understand.

Simple analysis will still baffle average citizens, because demand in the U.S. is going down, but prices are up.

According to recent analysis from Citi, petroleum demand was down 2.8 percent during the last quarter of 2011 compared to the same period in 2010. So, why are oil prices and by extension, gas prices rising? The main explanation is not just in current supply and demand considerations, but geopolitical concerns, which could affect future supplies.

Simply put, there is not a shortage of oil on the global market at the present time. However, markets are pricing in the possibility of a supply shock due to instability in the Middle East, specifically relating to tensions with Iran over its nuclear program.

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Iran is developing nuclear capabilities that officials there maintain are for peaceful purposes, such as power generation and medical uses. However, the United States and Europe allege that the program is dual purpose and will allow the country to develop nuclear weapons, destabilizing the region. Many argue that we could live with a nuclear armed Iran just as we do other countries. However, others argue that Iran must be denied the ability to develop such weapons and point to alarming comments from Iran's President, Mahmoud Ahmadinejad saying, "Israel must be wiped off the map."

Countries including the United States are taking an increasingly hard line to prevent Iran from obtaining a nuclear weapon. President Obama has stated that all options, including a military strike, are "on the table." Just last week, Israeli Prime Minister Benjamin Netanyahu spoke to the American Israel Public Affairs Committee (AIPAC) and said the following, "We've waited for diplomacy to work. We've waited for sanctions to work. None of us can afford to wait much longer."

Clearly, there is reason for markets to worry about military conflict.

Iran exports

Oil sales are extremely important to Iran and account for 50 percent of all government revenue according to the U.S. Department of Energy. Due to sanctions, the United States does not buy Iranian oil. However, oil is traded on global markets, which is the reason why a supply disruption from Iran can still affect prices in the United States. How much oil does Iran supply the world? Data compiled by Bloomberg indicates Iran produced approximately 3.45 million barrels of oil per (BPD) day in January 2012. The U.S. Energy Department estimates that Iran exports 2.2 million BPD, or about 2/3 of the country's daily production.

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Markets worry Iran's ability to export its oil may be adversely affected by international efforts designed to deny it the ability to develop nuclear weapons. Take the country's oil exports out of the mix and you suddenly have a severe supply problem in global energy markets. Saudi Arabia would be the only country able to counter the loss with spare capacity. Saudi Arabia's deputy oil minister Abdul Aziz Bin Salman bin Abdulaziz put spare capacity there at 2.5 million BPD. In others words, any disruption in Iranian exports would eliminate the only meaningful spare capacity to produce oil in the world, increasing global energy supply vulnerability.

Broader supply threat

Due to the importance of oil exports to Iran's economy, authorities there are warning western nations against military strikes on its nuclear program. In fact, the country threatened to close the Strait of Hormuz, a key passageway used to transport one-fifth of the world's oil exports. This threat only exacerbates fears of a supply shock. Furthermore, some speculate that any military confrontation with Iran would lead to instability in the entire region, causing even more concern about global energy supplies.

Rising oil prices

In October 2011, worries about Europe's sovereign debt crisis drove oil prices down to $77.48 a barrel, a 12 month low. When the markets in New York closed on Tuesday (3-13-12) crude oil traded at $106.72, representing an increase of almost 40 percent since last fall.

The big question is whether or not current high prices are here to stay. The answer: it depends.

If progress is made regarding Iran's nuclear program or at a minimum, the situation appears to settle down, and then some of the risk premium (estimated to be between $10 and $20 a barrel) will come off the price of oil. However, if tensions increase in the Middle East, prices will continue rising.

While most of the concerns regarding oil pricing are surrounding supply, demand must also be considered. Just as oil prices dipped in October, because of worries that the global economy was in danger of slowing dramatically, major concerns about economic growth, particularly in emerging markets could pull prices back down again.

Impact on consumers

Consumer spending makes up approximately 70 percent of the U.S. economy. Consequently, economists and analysts closely monitor anything that can affect the ability of consumers to spend. Analysts at JP Morgan estimate that for every $10 increase in the price of oil, real GDP declines 0.2 percent. If current prices continue, Bloomberg estimates higher prices will exact a $56 billion tax on consumers and subtract 0.6 percent from real GDP growth.

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While a few tenths of a percentage point may not sound like a big deal, first quarter GDP growth is tracking between one and two percent, a rate that can be characterized as sluggish. Moving forward, this is an issue that must be monitored closely. The price of oil will impact everything from the pace of economic growth to the U.S. presidential elections this fall.

The bottom line is what everyone pumping gas lately already knows: higher gas prices equal less money to spend elsewhere and consequently, slower growth in the broader economy.

How are gas prices affecting you? I'd like to know and can be reached on Twitter @DarinMellott.

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