Roubini: Iran is the greatest looming threat

Nouriel Roubini, the economist who predicted the credit crisis, says Iran is now the greatest threat to the world economy.

LOS ANGELES (CNNMoney) -- Nouriel Roubini gives an audience no shortage of scenarios to keep them up at night, but his number one worry right now is the looming threat of Iran building nuclear weapons.

Specifically, it's the risk of a confrontation between Israel and Iran, or the United States and Iran, Roubini told Michael Milken in front of hundreds of onlookers at the Milken Institute Global Conference in Los Angeles Wednesday.

Roubini, a notorious doomsayer and chairman of Roubini Global Economics, expects both Iran's push into nuclear weapons and the pushback from Iran and Israel to ramp up in the second half of 2012.

It's unlikely that President Obama will retaliate in any way, at least until after the November presidential election. However, if the situation does heat up, by 2013, whoever is the next president will likely be forced to push back.

As concerns over Iran spike, Roubini expects oil prices to keep rising. And while he thinks there will be a worldwide shift toward natural gas, it won't happen soon enough to calm fears over Iran.

"People are too optimistic about how fast the revolution in natural gas will happen," said Roubini. The infrastructure simply can't be built or rebuilt to make it feasible for cars, trucks and trains to use natural gas in the next 12 to 24 months. A more reasonable time horizon, he said, would be 20 to 30 years.

Political instability in the Middle East will also keep pressure on oil prices. "The entire Middle East is a mess, and it's not just Iran and Israel," said Roubini. "The Arab spring will become an Arab winter."

Rattling off the name of nearly every country in the Middle East, he said Iraq might be considered the safest spot, but even there, tensions among its various ethnic groups are heating up.

The Middle East ranks highest in Roubini's mind as a misunderstood threat, but he was quick to jump on the other big worry threatening global financial systems, explaining how a breakup of the eurozone could cause global cataclysms.

Unless you can restore growth to the eurozone, all of the austerity the euro countries are implementing won't make a difference, said Roubini, explaining that much of it depends on the euro currency itself.

"If you can't either devalue the euro to a real depreciation, inflate yourself, or grow yourself out of this problem, or deflation is not going work, the only solution is going to be to give up the euro and go to a national currency," Roubini said. "But if enough of those countries do that, the collateral damage in terms of losses to the creditors is going to be massive. So a breakup is going to be a mess."

On top of that, European banks still have "meaningful exposure" to central Europe, Asia and Latin America. "If something disorderly, either disorderly default and/or disorderly breakup were to occur in the eurozone, certainly financial contagion would be significant," he noted.

For anyone desperately seeking a bright spot from Roubini's words, he pointed to relatively healthy balance sheets among high-grade corporations as well as the recovery in asset prices globally since last year.

Roubini said he hasn't missed the run up in the stock market this year. His 401k is all in stocks. In 2007 and 2009, it was in cash.