How Bad Would it Be
So what to do about it?
Sanctions - not likely to work and likely to cause trouble, like $125/bbl oil.
Bomb Iran? Likely to get us chased out of the Middle East. Think $200 oil. Also not likely to work in the long run.
I think that the only real hope is a comprehensive world treaty, with strict rules and strict enforcement.
One slightly crazy idea would be for the traditional great powers (US, China, Russia, France, Britain and maybe India) maintaining a near monopoly on nuclear weapons. Israel and Pakistan might be permitted to keep a few under strict supervision. All other countries would be guaranteed against attack by the great powers. Any country attempting to develop nuclear weapons and refusing inspection would be subject to the death penalty.