Right now the greatest threat to America's economic recovery and tofurther market gains is the situation in the Persian Gulf. Absentthis danger of higher crude and gasoline prices, investors canreasonably anticipate a durable, if plodding, economic recovery andmodest relief from European debt fears now that the EuropeanCentral Bank has adopted an easier monetary policy. It is, then,the potential economic fallout from higher oil prices, not tomention the shock of a military confrontation, that poses thebiggest risk. If probabilities still favor some easing of tensionsand so continued economic and market gains, the danger issignificant enough to warrant serious attention.

It understates the current situation in the Persian Gulf—grosslyso—to describe it as tense. Whatever quibbles emerge among thedifferent intelligence sources, the basic contours are clearenough: Iran is on the verge of getting a nuclear weapon. It hasalready demonstrated rocket technology capable of delivering thatweapon, by some estimates, as far as the United States butcertainly as far as Europe and, of course, Israel. Tehran hasstonewalled all efforts by the United States, the United Nationsand the international community more loosely defined to discoverwhere its program stands or what its intentions are. A sanctionsregime, cobbled together by the United States and major Europeannations, seems to have hurt Iran, despite opposition from Russiaand China. No doubt that pain has prompted the government in Tehranto invite renewed negotiations, though Iran's past behavior leaveslittle reason to expect success. Military action from the UnitedStates, Israel, both of them or even, peremptorily, from Iran,remains a real threat.

Even now, well short of those extremes, the current level oftension and the threat it constitutes to ongoing oil flows havepushed up petroleum prices significantly. Since last fall, when thelatest problems with Iran began to mount, the price of a barrel ofoil (West Texas Intermediate) has risen more than 40%, from about$78 to about $110. The price of gasoline has risen almost as much,by 30%, from a national before-tax average of $2.40 a gallon to$3.12. Since according to the Labor Department, fuel of all kindsconstitutes about 9.8% of the average American's budget, this oilprice rise has already siphoned more than $280 billion, or about2.5%, from households' other consumption options. That more thaneats up, as the media widely indicated, the value of the payrolltax-cut extension Congress just recently passed and the Presidentsigned.