Oil prices could stall world economy

Associated Press

WASHINGTON

Just as the U.S. and global economies are finally strengthening, they face a new danger: rocketing oil prices, which topped $100 a barrel Wednesday.

The U.S. economy likely can absorb $100 oil and keep expanding, even though gasoline prices would rise further and growth would slow. But it would hurt.

Gasoline for U.S. motorists already costs more than at any point since 2008, despite ample supplies. The national average for a gallon of unleaded was $3.19 Wednesday — 53 cents more than a year ago. Analysts expect the average to range between $3.25 and $3.75 this spring.

Oil prices had been rising for months, but they jumped this week as violence gripped Libya. Analysts say any production declines in Libya likely could be absorbed by other producers such as Saudi Arabia. Libyan oil accounts for less than 1 percent of U.S. crude imports.

Still, analysts say concerns about violence in North Africa and the Middle East have triggered a “fear premium” that’s added about $10 a barrel.

Consumers and businesses would feel pinched by a sustained period of $100-a-barrel oil — and not just motorists. Stock prices, which have lost more than 2 percent so far this week, could sink further. That would reduce household wealth and consumer confidence. As fuel costs rise, so would prices for travel services and products containing plastics.

This month, several airlines tacked on fuel surcharges — extra fees that help cover fuel bills.

Rising oil prices have pushed jet fuel close to $3 a gallon. Fuel accounts for roughly one-third of the budget for U.S. airlines, up from less than one-fifth a decade ago. Fitch Ratings analyst William Warlick said if jet fuel reaches about $3.20 a gallon, “the whole industry will be challenged to stay profitable.”

Airlines soon may decide to eliminate some flights and ground older jets to cut fuel consumption, Warlick said. Delta Air Lines already has scaled back plans to add flights this year.

Analysts estimate that over a year, $100 oil would reduce U.S. economic growth by 0.2 or 0.3 of a percentage point. So rather than grow an estimated 3.7 percent this year, the economy would expand 3.4 percent or 3.5 percent. That likely would mean less hiring and higher unemployment.

The global economy wouldn’t be affected as much. In part, that’s because emerging economies consume less oil per person than industrialized countries do. In addition, many developing countries regulate or subsidize the cost of gas. Global growth would slip about 0.1 percentage point, economists estimate.

But oil prices around $100 a barrel could threaten European economies, many of which are net importers of oil and gas, haven’t recovered fully from the financial crisis and face heavy debt loads. Spain and Italy, for example, where gas at the pump already goes for about $8 a gallon, face years of a slow, grinding recovery. A spike in oil would deal their economies another setback.