The ripple effect of prices at the pump

Hold on to your wallets.

Those record gasoline prices are expected to climb even higher just as the summer driving season gets under way.

The problem is tight supplies - a product in part of the war in Iraq - combined with increased demand as a result of economic recovery in the US and Asia. Add to that mix OPEC threats to tamp down its spigot, and oil experts predict that prices at the pump this summer will run from the current record high of $1.74 a gallon to $2 a gallon.

That said, no one thinks the price spike will prompt families to sit home in the summer heat or suddenly switch to solar energy, although some may choose a cabin in the woods closer to home.

Yet some economists are predicting an uptick in the cost of consumer goods from shoes to strawberries, as truckers' pricey trips to the pump are passed on to retailers and then on to you. Indeed, some believe gasoline prices are already putting a drag on the so-called jobless recovery. Come Memorial Day, they predict gas costs could put a damper on consumer spending, slowing the pace of recovery even further.

But others contend the price spike will have little impact, other than a touch of personal frustration when drivers reach for their credit cards. They note that inflation so far has remained fairly low - in part because the high price of gas is being offset by other deflationary factors, such as the low cost of housing, thanks to the refinancing boom.

The two competing camps do tend to agree on one thing: Gas prices will have to spike far higher than $2 a gallon for them to derail the current recovery.

"As shocking as the oil prices are, they're not shocking enough to knock us into a new downturn," says Lakshman Achuthan, managing director of the Economic Cycle Research Institute in New York. "The window of vulnerability that was open a year or two ago in this economy has slammed shut."

But even optimists say there could be a few dark clouds on the horizon. If crude oil prices stay high - which most analysts think they will, barring a sudden change - that could put a crimp in consumer spending and the pace of recovery.

"My expectation is that the higher oil and electricity prices are going to take a serious bite out of consumer budgets in the second or third quarter, and we're going to see unexpected shortfalls in economic growth by the third or fourth quarter," says economist Philip Verleger, a visiting fellow at the Institute for International Economics in Washington.

To get a sense of just how big that bite is, figure that every 1 cent rise in the price of gas takes $1 billion dollars out of Americans' pockets. So if gasoline does increase to $2 a gallon, it could offset the entire impact of this year's tax cuts. "It means that all of the tax breaks the Bush administration has given the consumers will end up going to the oil companies, OPEC, and sellers of electricity and natural gas," says Dr. Verleger.

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