Surging oil prices could blunt economic growth

Surging oil prices helped send the economy into a nerve-wracking “soft patch” in 2004 and could do it again this year if they rise much higher from current record levels.

The higher cost of energy has caused little economic damage yet despite the pain drivers are feeling at the gas pump, where regular gasoline is selling for an average $2.05 a gallon nationwide — more than $3 in some locations. 

But the price of crude oil has already risen 30 percent this year to a record of nearly $58 a barrel, defying the expectations of analysts who expected that oil would settle back into the $40 range after last year’s run-up. If prices remain at current levels or higher, growth could slow substantially in the summer and fall, analysts say.

Oil prices rose slightly Friday to close at $56.72 a barrel in New York trading, within striking distance of the all-time $57.60 record hit Thursday.

“I still expect (energy) prices to moderate,” said Mark Zandi, chief economist for Economy.com, a consulting firm. “But the longer they stay as high as they are, the more damage they will do to the economy. If prices stay where they are even for a couple or three months, growth will be measurably slower than currently expected.”

Rising energy prices create a two-headed monster that attacks the economy both by sucking away discretionary income from consumers and businesses and by pumping up  inflation at the wholesale and retail levels.

Zandi and other economists say the higher oil prices could add to the economic pressure created by rising interest rates and a decline in federal tax cuts and spending increases that had helped buoy the economy over the past two years.

Federal Reserve policy-makers, who meet next week, have signaled they intend to continue raising short-term interest rates to keep a lid on inflation, making it difficult for them to respond if rising oil prices begin to undermine growth. The Fed is expected to raise key benchmark rates another quarter-percentage point at their meeting Tuesday, and  there is growing speculation they will have to raise rates a half-point sometime this year to stay ahead of the curve on inflation.

EYE ON ENERGY Gas prices jump to record, could go higher Oil 'peak' not seen coming any time soon Can Saudi Arabia keep its oil promises? OPEC members pledge to pump more oil Have higher gas prices changed your habits?

So far this year the economy has been growing a bit faster than expected, with retail sales showing surprising strength in the first two months of the year, capital spending by businesses rising at a strong clip and the housing industry continuing to boom.

The latest economic figures are “very, very consistent with the idea that we had really excellent growth last year and now we’re settling down to sustainable, solid, but not great growth,” said Joel Naroff of Naroff Economic Advisors.

That strong growth gives many analysts confidence that the economy will withstand the battering of higher energy prices relatively unscathed.

“The good news is that we went into this period of high oil prices with strong momentum,” said Nariman Behravesh, chief global economist for Global Insight, a consulting firm. “Certainly there is a risk that if oil prices go to $70 a barrel, that could really do some serious damage to growth. It wouldn’t push the economy into recession, but it could trim growth to 2.5 percent.”

MORE FROM EYE ON THE ECONOMY

Eye on the Economy Section Front

'Problem' banks at highest level in 16 years RV industry no longer running on empty Long-term unemployed face dwindling options  Obama warns of 'double-dip recession' One in four metro areas in recovery mode Geithner warns lack of loans may slow recovery Of bats and billions: Following stimulus funds As stimulus funds trickle down, debate heats up Commercial real estate bust looms NYT: Ex-homeowners forced into shelters Eye on the Economy Section Front   Add Eye on the Economy headlines to your news reader: