Rising gas prices may slow down economic recovery image

On Tuesday, U.S. gasoline prices have climbed to a national average of $3.54 a gallon! This marks an approximately 43 cent increase from the $3.11 drivers were paying one month ago when the Libyan unrest began; a 4% rise in just one week.

It is the second time in five years that crude oil has topped $100 per barrel and the first time since Hurricane Katrina in 2005 that the federal government has considered a dip into strategic oil reserves to counter the situation

Analysts worry gas prices will slow the economy. Over a year, they estimate, oil at $100 a barrel would reduce US economic growth by 0.2 or 0.3 of a percentage point.

“I can’t afford this. It’s ridiculous,” said Lindsey Mike from Hawaii, where a gallon cost $4.1.

Sayed Bilal, a cabdriver in Rockville, estimated that he’s spending $200 more a month on gas than he’s used to a year ago.

When gasoline prices spiked at over $4.00 per gallon in July 2008, U.S. consumer spending posted its biggest one-month decline since September 2001. Moreover, higher energy prices also contribute to increases in the overall rate of inflation.

All these are risk factors in terms of sustaining our current economic recovery, bringing down unemployment, and continuing to drive growth in corporate earnings.

“The uncertainty is what’s going to happen this summer, is it going to creep up from $3.50 to $4 a gallon? Then it becomes troublesome,” said UNCC Economics Professor John Connaughton, who gave his quarterly economic outlook Tuesday.

The UNCC Economics Professor says a sudden 50 cent jump can be the factor that slows down an already slowly recovering economy.

He says every 50 cent spike takes around a $150 billion bite out of the economy.

According to Nielsen Wire, a 50-cent increase in gas prices would cost the typical U.S. household about $52.50 per month, and if prices were to rise two dollars, that would mean $210 a month, or more than $2,500 a year.

A Valley economist predicts people will slow their spending while the price at the pump remains high.

People won’t buy the things they normally do because of the extra money they have to spend on gas, most of which heads out of the country.

For every one cent increase in gas prices, that’s a billion dollars in extra spending consumers will spend on gas instead of other goodies the Valley economist said.

But why prices are rising and rising?

The global economy has been improving for six months, and of course, more activity needs more demand for oil. But our dollar has fallen relative to other currencies. As the dollar is going down, normally, it becomes less attractive to hold, so investors are increasingly dumping the currency and moving into oil, gold and stocks. That, in turn, has helped fuel a strong recovery in commodity prices and the recent stock market surges.

And then the recent political uprisings in Northern Africa—Tunisia, Egypt and especially the current turmoil in Libya—have had a major impact on oil and gasoline pricing here in the U.S.

What happens if gas prices go even higher?
“If gas goes to $5, it will cripple any recovery,” Daniel O’Connell, vice president of energy at MF Global said. “People will be taking public transportation, road trips will be put on hold and flying will be a dream,” warned O’Connell.

The U.S. imports 40 percent of its crude from Europe, refines it, and then exports the distillates back to Europe, including gasoline and diesel. So any disruption in Europe reverberates in the U.S.