Economy feels shock of oil prices

Twelve months of rising energy prices are starting to threaten the US economy.

A spike in oil prices has almost doubled the price of a commodity that literally fuels much of the economy. Combined with an even sharper increase in the cost of natural gas, the hike is siphoning cash from consumers and businesses at a time when the US economy is frozen in place.

The extra energy bill - impacting everyone from commuters to airlines and factories - could amount to as much as $100 billion on an annualized basis. Economists say it's enough to shave 1 full percentage point off economic growth.

And, if prices stay at this level or rise further, the risk of another recession is very real. In fact, rising fuel costs helped to cause or deepen the past four recessions: the mid-1970s, early 1980s, 1990-91, and 2000.

"If the prices are sustained for more than a few months, it makes a recession more likely," says Mark Zandi, an economist with Economy.com., an economic website.

The higher prices are showing up almost everywhere - from the rising cost of heating an apartment in Boston to the amount of money it takes to ship a head of lettuce from Mexico to Chicago. Airlines and semi-operators are tacking on fuel surcharges. And, last week, some heavy-industrial businesses said they would pare back their output until prices evened out while others warned Congress that the nation could expect higher prices for products ranging from fertilizer to bathroom fixtures.

The situation reminds Mr. Zandi of 1990, just before the Gulf War. Back then the price of oil rose from $20 a barrel to about $40 a barrel, just a few dollars more than current levels. Higher energy prices, combined with anxiety over the upcoming battles helped to drive the economy into a recession. "It's not too dissimilar to today," he says.

Economists learned from the 1990s experience that sharply rising energy prices have real consequences. "Money spent at the gas pump is money you can't spend at the mall," says David Wyss, chief economist for Standard & Poor's. "It hurts consumer confidence."

Consumer confidence is definitely wavering. Last week, the Conference Board, a business research organization, reported that its confidence index declined sharply in February. "Lackluster job and financial markets, rising fuel costs, and the increasing threat of war and terrorism appear to have taken their toll on consumers," says Lynn Franco, director of the board's Consumer Research Center.

That's certainly happening to Rich and Susan Minio, who rent an apartment in Needham, Mass. Even though they keep the thermostat at 65 degrees, she says their utility bills have doubled. Their last bill was for $311. "It's eating up our budget," says Ms. Minio, who works for a book publisher. "Now, we don't go out to eat as much, in fact, we barely do anything at this point."

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