Consumers likely to shake off rising cost of oil

Despite $100 milestone hit, energy spending making up less of economy

	Lower-income families feel the effects of price increases most dramatically. With heating oil costs expected to jump 33 percent this winter, according to the Energy Department, families who rely on heating oil will have less money to spend on other things.
Carolyn Kaster / AP

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A look at the soaring price of crude oil.

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How high can oil go?
Jan. 2: After hitting $100, how high can oil prices go? A panel of experts on CNBC tackles the issue.

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updated 3:59 p.m. ET Jan. 2, 2008

NEW YORK - With oil at the once unfathomable price of $100 a barrel, consumers can expect the cost of filling their gas tanks, heating their homes — in fact, the price of most everything — to also keep rising.

Still, analysts don’t expect record-high prices by themselves to send the economy into recession, simply because expensive as oil is, energy doesn’t consume as big a chunk of Americans’ budget as it did decades ago.

“So far, consumers have done an amazing job of ignoring high oil prices, not to mention falling home prices,” said David Wyss, chief economist at Standard & Poor’s.

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A barrel of light, sweet crude reached triple digits for the first time Wednesday, soaring 44 percent since August and 57 percent since the end of 2006. Meanwhile, gasoline prices at the pump reached a national average of $3.05 a gallon, according to AAA and the Oil Price Information Service. That’s below their May peak of $3.23 a gallon but likely to go higher as the spring and summer approach.

“It’s just crazy, I don’t know how much worse it can get,” said Susan Witte, of Fairless Hills, Pa., while shopping at a suburban Philadelphia sporting goods store one recent morning.

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But Chicagoan Fraz Baig was unfazed as oil approached its milestone, although rising prices are making it more expensive for him to gas up his just purchased 2008 Infiniti FX SUV.

“I’m doing well financially and I’m single, so I’m not really worried,” said Baig, who works in Internet technology solution sales for IBM Corp.

Rising energy prices were cited as a contributing factor in disappointing sales for the just-ended holiday season, along with the continuing slump in housing and an overall uneasiness about the economy. But economists say that generally, the jump in oil is less devastating than previous spikes because incomes have risen faster than energy costs.

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“The percentage (of personal income spent on energy) was far higher in 1979-80 than it is now,” said Kay Smith, a macroeconomist at the Energy Information Administration.

In 1981, 14 percent to 15 percent of the nation’s gross domestic product was spent on energy, according to Lester Lave, professor of economics at Carnegie Mellon University’s Tepper School of Business. That’s fallen to 7 percent today.

In part, that’s because energy efficiency has increased.

“It’s just not (as) important to the economy anymore,” Lave said. “Prices are not high enough so that they’re going to get middle-income people to change their behavior.”

Still, that could change if prices keep rising. The question is at what point do prices start to truly hurt.