Video: Oil prices continue to rise

By Anne Thompson Chief environmental correspondent
NBC News
updated 7/14/2006 7:20:28 PM ET 2006-07-14T23:20:28

If you think $3 gas is bad, what about $4? Analysts say it could be just around the corner because of the fighting in the Middle East.

"If it goes bad, we could be talking $4, $4.50, maybe even $5," says Phil Flynn, an oil analyst with Alaron Trading Corp.

Not because Israel or Lebanon has oil, but because Iran, the world's fourth-largest producer, supports Hezbollah's battle against Israel.

"This is also a proxy war between Israel and Iran to some extent," says Daniel Yergin, CNBC's global energy analyst, "and it's a demonstration of what could happen if sanctions or a confrontation with Iran over its nuclear program gets worse. This demonstrates the kind of trouble that Iran can cause."

The fear is Iran could pull its 2 million barrels a day from the world market.

"If that oil is taken off the market, we are basically going to start seeing our world inventory start to shrink overnight," says Flynn.

And prices would go even higher, because there is little spare capacity.

Oil makes up about half the cost of a gallon of gas, and at these prices, the pain is now going beyond the pump.

All the way to the bunny shampoo and bird seed Ruth Hanessian sells at her Maryland pet shop. So she's raising prices.

"I can see when I have 50 percent of my prices going up on one invoice, that it's already having an effect when we're slightly over $3 a gallon," she says.

All the increases are based on fear — without a hurricane or other major event that really squeezes the world's oil supply.

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