An Israeli strike on Iran could hurt the Harris campaign in its final stretch if gas prices soar

• Iran launched a massive ballistic missile strike on Israel on Tuesday.
• Israel has vowed to retaliate, potentially against Iran's oil infrastructure.
• The move could drive oil prices up further, creating a headache for Harris' campaign.

Israel has vowed to respond to Iran's massive ballistic missile strike earlier this week, and it may have Iranian oil production facilities in its sights.

Such a move could prompt a spike in oil prices, which are already surging after the attack and in anticipation of Israeli retaliation. Such an outcome could create a headache for Vice President Kamala Harris' presidential campaign in the final weeks before the pivotal election.

Historically, presidents in office when gas prices surge don't fare well. Political scientists have found that a rise in gasoline prices is correlated with a drop in presidential approval. Incumbents or their party don't usually fare well when viewed unpopularly. Fairly or unfairly, Americans blame the president when it costs more to fill up, even if the events causing a price spike are out of their control.

Analysts say that, for now, all sides have incentives to avoid taking actions that could further destabilize the region.

"I think there is still a little bit of stability in an unstable world; it wasn't like Russia's invasion of Ukraine," Patrick De Haan, head of petroleum analysis at GasBuddy, told Business Insider.

"The Middle East is really critical," he said, "but there's a lot of pressure on both sides to have this not escalate into a war. I think it would be really exceptional to see this escalate out of control."

De Haan pointed to how oil markets responded to Iran's attack in April, spiking briefly before going back down. The major concern this time around is that Israeli leaders seem to want a much larger response than what occurred in the spring.

"In April, we saw an extremely limited Israeli response, striking a single air defense battery in central Iran. This was meant as a message to Tehran that Israel can successfully target and destroy Iranian assets over long distances if necessary," Clay Seigle, a political risk strategist, told Business Insider. But in July, Israel destroyed an oil import terminal controlled by the Iran-backed Houthi rebels in Yemen.

While the attack had a limited impact on the Houthis, the message was clear to Iran, "highlighting the fact that oil assets are on the target list of Israeli planners. The message was repeated earlier this week with a second such Israeli attack on Houthi-controlled oil and energy facilities," Siegle said.

Analysts say a direct attack on Iranian oil refineries or larger unrest in the region would potentially affect shipping routes in the Straight of Hormuz.

The market has been able to absorb concerns about past events. Kit Haines, a global crude analyst at Energy Aspects, said that fears about supply issues related to sanctions after Russia's invasion of Ukraine or the 2019 drone attack on Saudi Arabia's Abqaiq oil largely did not match the actual realities.

Still, Haines said that this time, the concern is about broader potential unrest in the region.

"This time around, I think people are seriously worried," he said, explaining that "we have seen things go off in the Middle East before, but actually, there is a pretty sizeable potential here that it could impact supply. It's not necessarily about what any Israeli response will do, I think it is the secondary effects of that.

Israel has vowed to retaliate after Iran's massive attack earlier this week

Iran launched over 180 ballistic missiles on Israel on Tuesday, likely the largest such attack in history, in response to Israel's killing Hezbollah leader Hassan Nasrallah last week and Hamas political leader Ismail Haniyeh in July. Iran's targets were apparently mostly military and government installations, some of which are near or in densely populated central Israel.

Israel, with help from US forces in the region, said it largely intercepted the attack, with the Biden administration saying that the strike was "defeated and ineffective." Although much is still unclear about the impact of the attack, some satellite imagery has shown Iranian missiles did hit Israeli military targets. Israeli Prime Minister Benjamin Netanyahu has vowed to retaliate with US support.

"The regime of Iran does not understand our determination to defend ourselves," Netanyahu said, adding that "they will understand. We will stand by the rule we established: Whoever attacks, we will attack them."

Speculation about which potential Iranian targets Israel could strike have shifted from Iran's nuclear production facilities to the country's vast oil production facilities. Iran is a significant oil producer with major reserves and production capabilities.

In the aftermath of the attack, the price of oil has already surged up, prompting concerns that, should the conflict broaden and potentially further entangle US forces in the region, oil and gas prices could skyrocket.

Seigle said that market prices tend to "fluctuate in times of actual or feared supply shortages as traders re-price the value of an increasingly scarce commodity relative to demand," noting that supply disruption is related primarily to two factors: how much oil is offline and for how long.

If Israel did strike Iran's oil, it would likely have two main targets. One is its oil refiners, which provide the country with transportation fuels and gasoline. The other is Iran's production and export facilities.

If Israel hit even a few of its petroleum refiners, it "could create a gasoline fuel shortage in Iran," Seigle said. But that wouldn't necessarily impact the global oil supply. If Israel struck Iran's oil production and export facilities, that would have "far greater repercussions," he said. 

"A military operation that cuts this output would leave the world with less crude supply, causing prices to rise. This week, for the first time, markets finally began contemplating this scenario; oil prices have increased more than 5 percent as this risk begins to be 'priced in,' Seigle said.

US President Joe Biden has weighed in on discussions surrounding what Israel's retaliation could look like. On Wednesday, Biden said the US wouldn't support Israeli strikes on sites related to Iran's nuclear program. Then, on Thursday, he said the US and Israel were discussing whether the US would support Israel striking Iran's oil facilities.

Hours after Biden's comment, crude oil prices jumped 5%. The National Iranian Tanker Company also moved its tankers from Kharg Island's oil terminal in apparent fear of an imminent attack, per TankerTrackers.com, an independent online service that keeps tabs on the movements of crude oil.

On Friday, Biden appeared to backtrack on his earlier targeting comments, telling reporters that if he were in the Israeli's shoes, he would consider alternate targets.

The risk of the conflict expanding is high. Nicholas Carl, the researcher manager of the American Enterprise Institute's Critical Threats Project who focuses on Iran, explained to Business Insider that "throughout this entire series of events," there's been "extraordinary risk of miscalculations" for both sides.

If the US did support striking oil facilities, it would come at odds with Washington's stance on Ukraine doing the same thing to Russia. Earlier this year, the US urged Ukraine to cease its attacks on Russia's energy infrastructure, warning its drone strikes could drive up global oil prices and provoke retaliation.

At the time, Ukraine was using long-range attack drones to strike various Russian oil refineries, terminals, storage facilities, and depots, intending to hurt its production capacity. Russia is one of the world's largest energy exporters, although the US and its allies have imposed hefty sanctions on its industries.

Washington's concerns came just as Biden began pushing his reelection campaign and before his historic dropout.

"US policymakers and politicians are more dedicated to Israel's security (and to showcasing this dedication) than they are to Ukraine's," Seigle said. Publicly, they're less likely to rein Israel in from those ambitions. Privately, though, Biden officials are "surely very concerned" about the impact of such a strike," he added.

Israel and Iran hold "more potential to disrupt global markets and send prices surging than does the Russia-Ukraine war," Seigle said.

Few things are watched more closely than gas prices ahead of an election

If Israel does target Iran's oil industry, the 2024 presidential election could be rocked by rising oil prices ahead of the majority of the voting.

Oil prices had notably been trending downwards in the months prior to Iran's ballistic missile attack on Israel. Back in September, global oil prices fell to the lowest level in almost three years, and the US has seen a historic year of oil production.

But if prices at the pump were to soar in response to upheavals abroad amid domestic concerns about issues like inflation, it could be a problem, as it has been historically. That said, the impact of changes like these has begun to lessen in this hyperpartisan era. It is increasingly less likely for a president's approval rating to swing dramatically.

As of Friday, the national average was at $3.17 a gallon, according to GasBuddy. At the end of September, the average was down both on a month-to-month basis and on a year-to-year basis. Predicting gas prices can be difficult, given just how dramatically markets can shift, but De Haan said he did not expect prices to "skyrocket out of control."

"I think there are some reasons why gas prices would remain in somewhat of a check, but if some of these boxes start getting checked at the same time, if there are significant escalations in the Middle East, and if there's a perfect storm in the US, a perfect hurricane knocking out refining capacity, it could still lead to a surge in price before Election Day," he said. "I just think the odds of a major surge are rather low."