Rapidly escalating gasoline prices may push the nation back into a recession as scared Americans cut back on spending, economists warn. Each 1-cent increase in gas prices is the equivalent of a $1.2 billion “tax” on Americans, one economist says — and that figure would compute to $31.2 billion during the past month alone.
David Kotok, chairman and chief investment officer at Cumberland
Advisors, warns that the growing risk of civil war in the Middle East oil patch is very likely to mean a quick end to a U.S. recovery.
Kotok offered the $1.2 billion “tax” figure to his clients in a note. Because a dollar rise in the barrel price means a 2.5 cent increase in gasoline, expect gas to cost between $4 and $5 soon, he warns. Consumers are already getting hit with sharp increases in food prices.
Analysts and economists worry that high gasoline prices could slow the recovering economy by lowering profits for businesses and reducing disposable income for drivers.
Robert Wagner, 51, a high-school teacher from Thornton, Colo., the higher fuel costs mean cutting back on movies and dinners out for him, his wife and their two children. "We're very, very frugal right now," he told the AP.
A gallon of regular gasoline jumped another 8.1 cents during the weekend to a new national average of $3.37 a gallon, according to AAA, Wright Express, and the Oil Price Information Service. Gasoline now costs 26.7 cents a gallon more than it did a month ago, and 66.4 cents higher than its price on year ago.
Gasoline prices are at their highest levels ever for this time of year, when prices are typically low. And with unrest in the Middle East and North Africa lifting the price of oil to the $100-a-barrel range, analysts say pump prices are likely headed higher.
Investment guru and CNBC “Mad Money” host Jim Cramer has said that, if gasoline hits $4 a gallon, it could push the U.S. economy back into a recession.
"I've never been a believer in the double-dip scenario," says Cramer, according to CNBC. "But with $4 gasoline, it could happen, especially if high fuel costs create a palpable sense of inflation."
He’s not the only analyst worried about the economic impact of higher gas prices. Mark Haines, co-anchor of CNBC’s “Squawk on the Street” program, also said Monday on MSNBC’s Morning Joe program that he fears a double-dip recession if U.S. oil hits $150 a barrel.
“No one knows for sure,” he said. “But if you told me oil’s going to $150 by spring or summer, then I would say, ‘OK, I’m putting my money on a double dip.”’
A double-dip recession would drive record U.S. unemployment even higher, and would greatly complicate President Barack Obama’s hopes to win re-election.
Oil and gasoline prices soared last week as the rebellion in Libya virtually halted oil shipments from the country. WTI hit $103.41 a barrel on Thursday before falling back.
Haines also pointed out that “Libya itself is not a critical part of the oil mix. But Libya introduces a fear factor into the market, people are afraid.”
The larger concern economists have is whether the Middle East rebellions could spread to affect oil-rich Saudi Arabia, the only nation in the world with enough reserve production capacity to compensate for a significant disruption of oil due to turmoil elsewhere.
Gasoline prices commonly fall in the winter and rise in the spring as refiners switch to more expensive summer blends of gasoline. Since 2000, prices in May have been 52 cents a gallon on average higher than in February, the Energy Information Administration.
During a year, analysts estimate, oil at $100 a barrel would reduce U.S. economic growth by two-tenths or three-tenths of a percentage point. Rather than grow an estimated 3.7 percent this year, the economy would expand 3.4 percent or 3.5 percent. That probably would mean less hiring and higher unemployment.
Americans are less prepared to absorb the spike in gasoline prices than they were the last time prices rose this high in 2008, because unemployment is higher and real estate values are lower, says David Portalatin, an analyst for the market research firm NPD Group.
It had been four months since gasoline rose beyond $3 per gallon. During that time, drivers have spent $14 billion more on gasoline than they did a year ago, Portalatin told the AP.
Meanwhile, a tax cut that began last month gave consumers the biggest jump in their incomes in nearly two years. But Americans boosted their spending only slightly, a sign that many people are being cautious with their money even as the economy improves.
Consumers increased spending 0.2 percent in January, the smallest gain since June, the Commerce Department reported Monday. Personal incomes jumped 1 percent, reflecting the 2 percentage point reduction from the Social Security tax cut.
The modest 0.2 percent rise in spending was even weaker when inflation was taken into account. After adjusting for price changes — particularly a steep rise in energy costs — spending actually dipped 0.1 percent in January. That was the poorest showing since inflation-adjusted spending had fallen 0.8 percent in September 2009.
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