August 16, 2005
Tuesday

America's economy might not be able to stomach oil at $66 a barrel. Not easily, at least.

So far, the country has largely shrugged off oil's steady climb, even as the cost of crude has risen 54 percent this year.

But with gasoline prices perilously close to $3 per gallon, some experts have concluded that the country's economic growth could slow, sapped by the cost of energy.

According to some surveys, the consumers whose spending pulled America out of its post-Internet slump aren't buying at their former torrid pace. Half of those households polled by a shopping-mall trade association last month said gas prices had forced them to cut back.

Consumers in California have seen an average price jump of 60 cents a gallon for unleaded regular gasoline over a year ago.

Gasoline and diesel costs are pinching company budgets as well. Airlines hammered by soaring jet-fuel bills raised their ticket prices last week, their eighth increase this year. Retailers large and small are paying more for shipping and must either pass those costs on to customers or find some way to absorb them.

"I think we've crossed the line into an area where oil prices will now hurt the economy," said Steve Yetiv, a professor of international affairs at Old Dominion University and author of "Crude Awakenings: Global Oil Security and American Foreign Policy."

The extent of the damage, however, might not be visible for months, he said, since fuel-price increases take a long time to push up the price of consumer goods.

"There's a lag time," Yetiv said. "But I do think we're in the period where we can't see it for sure, but it's in motion."

Plenty of economists disagree. They acknowledge that high fuel prices are squeezing family and business finances. Still, they note, the economy is growing at a healthy clip, adding jobs, even though oil prices have been above historic norms for more than a year. As long as prices rise slowly, they say, the economy has time to adjust.

"I don't see any signs, in terms of the macro-economy, that anything's going into the soup," said Stanford University economist James Sweeney. "I don't anticipate, at this price level, that we're going to have any large macro-economic dislocations. But the higher the cost, the more difficult it's going to be on the budgets of families that drive a lot."

Speculation on how high oil can climb has become a bleak hobby on Wall Street, as prices have shattered one numeric record after another this year. They still haven't hit their all-time peak from 1981, when prices adjusted for inflation hit $86 per barrel following the start of the Iran-Iraq war.

Still, many industry analysts see reasons they could climb higher.

International demand for oil has grown so fast that the world's petroleum producers are pumping full bore to meet it. The spare capacity that, in the past, made up for unanticipated supply disruptions is gone.

The diplomatic showdown over Iran's nuclear program has raised fears of more conflict in the Persian Gulf. So have terrorist threats in Saudi Arabia and the recent death of King Fahd. Refinery outages in the United States have added to the market's unease.

The high prices have also attracted a flood of speculative investors, adding further momentum to the market. That makes it difficult to sort out how much the recent price surge has reflected fundamentals and how much it has been a product of trading strategies.

"It's hard to put your finger on anything that's going to trigger any kind of market downturn at this point," said Peter Zipf, editor in chief of Platts Oilgram News, an industry newsletter.

The American economy depends less on oil than it once did, since manufacturing no longer dominates. But oil still affects the price of anything made in a factory, grown on a farm or shipped from one location to another.

Retailers, however, have a hard time passing those costs on to consumers, knowing that some of their competitors might be willing to endure them to keep prices low.

Consumer spending has held up through much of the last year's gas-price increases. Retail sales grew a solid 1.8 percent in July, according to government statistics.

But almost all of that growth came from car sales, juiced by special one-time offers from American automakers. Take out the cars, and retail sales grew just 0.3 percent, about half the gain economists expected.

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