Western nations fear Iran is building a nuclear weapon and have been trying to force it to open its facilities to inspection. Iran has refused, turning away international inspectors this week for the second time this month. The United Nations said Friday that Iran has responded to the recent scrutiny by speeding up production of higher-grade enriched uranium, feeding concerns that it is developing a bomb.
As both sides dig in for a protracted standoff, investors are snapping up oil contracts in case fighting breaks out in the heart of the one of the world's biggest oil-producing regions. "Everyone's pricing in the potential for war now," independent analyst Stephen Schork said. "Without a concrete resolution, nobody knows how high this can go."
Israel hasn't ruled out an attack on Iran, and Iran has said it is ready to strike pre-emptively, possibly targeting the Strait of Hormuz, if it is threatened. The Persian Gulf passageway is a potential choke point for oil supplies. One-fifth of the world's oil tankers pass through it every day.
On Friday benchmark West Texas Intermediate crude rose by $1.94 to end the week at $109.77 per barrel in New York. Brent crude rose by $1.85 to finish at $125.47 per barrel in London.
WTI peaked near $114 a barrel last May, while Brent rose above $126 per barrel.
The price of gasoline, which is made from crude oil, has soared with oil prices. The national average jumped by nearly 12 cents per gallon in a week, with state averages above $4 per gallon in California, Alaska and Hawaii.
It looks like they'll keep climbing.
Tom Kloza, publisher and chief oil analyst at Oil Price Information Service, said pump prices will add at least another 10 to 15 cents per gallon in coming days to reflect a recent jump in wholesale markets.
At $3.65 per gallon, gasoline is still below last year's high of $3.98 and the record $4.11 set in 2008. Kloza says pump prices are on pace to top both of those in coming months. He thinks gasoline will climb as high as $4.25 per gallon by late April.
The rise will weigh on the economy, pushing leisure and business travel costs higher. Every one-cent increase in the price of gasoline costs the economy $1.4 billon, analysts say.
Prices have been surging particularly on the West Coast where a BP refinery was shut down after a fire. That refinery in Blaine, Wash., is the third-largest on the West Coast with a production capacity of 230,000 barrels per day.
The closure comes at a tough time for the refining industry. Most refiners are already slowing production to get ready for a switch over from winter to more expensive summer fuel blends. The seasonal switch usually creates a temporary dip in supplies that pushes prices higher at this time of year. The loss of the BP refinery could make that dip even deeper.
Gasoline has become a major political issue this year as prices tick higher.
Some lawmakers have called on the Obama administration to release more oil from emergency stockpiles in the Strategic Petroleum Reserve, but analysts say that would be ineffective. The government tried that last summer after the Libyan uprising shut down that country's oil fields. Prices dipped slightly but eventually rebounded.
Independent oil analyst Andrew Lipow pointed out that the U.S. has adequate oil supplies right now, and a release of reserves wouldn't make much sense. Traders are mostly concerned with how the Iran situation will affect supplies this summer. Nobody's sure what will happen, Lipow said, and that is pushing investors to buy more oil as an insurance policy against a major conflict.
"It's just unclear how this plays out," Lipow said. "The worry is that Iran will be forced into a position that they try to impact their neighbors in some way" and curtail oil production in the entire region.
In other energy trading, heating oil rose by 2 cents to finish at $3.32 per gallon, while gasoline futures rose by 4 cents to end at $3.15 per gallon. Natural gas prices fell by 7 cents to finish the week at $2.55 per 1,000 cubic feet.