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The embargo will prove leaky because once oil flows onto the ocean, it will go wherever the money is. Also, we would expect most of the embargoing countries to be reluctant to enforce the ban strictly.
Still, as in 1973, such an embargo could create significant short-term problems for the economy and the U.S. oil market. Prices would probably peak above $90/barrel for a short while, but we would expect them to come back fairly quickly to the world level, which is essentially unchanged from the baseline. Only a small price differential would exist in the longer run. The other economies would be slightly hurt because of the weaker U.S. economy and consequent loss of exports.

However, the impact would be attenuated because the U.S. slips only slightly from the baseline projection. Again, worse cases than any of these are entirely possible, with resulting impacts on the U.S. and world economy that are nearly impossible to model. The best hope is for a diplomatic breakthrough-and a little luck -to help limit the outcome to Scenario 1.

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* David Wyss is Chief Economist with Standard & Poor's, New York.