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Soaring energy prices bad news for the economy

The high cost of oil and gasoline could act as a tax on consumers and undercut the government's stimulus plan.

By Ron SchererStaff writer of The Christian Science Monitor / February 21, 2008

Filling up: John Lee stops at a station in Boston. Gas prices are up 51 cents a gallon from a year ago.

Mark Thomson

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New York

Once again, concern is rising about the price of oil and gasoline.

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On Tuesday, the price of oil hit a record $100.01 a barrel, up some $14 in eight trading days. It's the second time since late December that the price has hovered at the $100-a-barrel level.

The sharp rise is already showing up at the gas pump: Between Tuesday and Wednesday, the price of gasoline rose 4 cents a gallon, reports GasPriceWatch.com. Since Feb. 9, gasoline prices nationally are up 10 cents a gallon, for an average price of $3.05 a gallon.

For the economy, the run-up could not come at a worse time. Many economists believe the US economy is teetering on the edge of a recession. Higher energy prices act as a tax on consumers, absorbing money that would normally be used to buy other things.

If energy prices remain this high – or go higher – they could begin to eat into the rebate checks that the government is planning to start sending taxpayers in May.

"This is bad for the consumer and the economy," says Dennis Jacobe, chief economist at the Gallup Organization in Washington. "It will be an offset to the fiscal stimulus everyone is talking about."

Motorists are paying much higher prices than they were a year ago. According to GasPriceWatch.com, gasoline prices are up 51 cents a gallon from a year ago, when the price of oil was closer to $60 a barrel.

On Wednesday, some of those price increases were reflected in a sharp rise in the Consumer Price Index, which rose by 0.4 percent in January, compared with December. Energy rose 0.7 percent. Yet even with energy and food excluded, the CPI was up 0.3 percent – much higher than the Federal Reserve would like to see.

The last time oil prices reached this level was at the end of December. Then, oil prices fell back to about $86 a barrel. Energy analysts talked about the price of a barrel of oil settling in for 2008 in the low $80s.

But since then, reports have surfaced that the Organization of Petroleum Exporting Countries (OPEC) might cut production when it meets in the first week of March. OPEC currently produces close to 30 million barrels per day. On Feb. 13, the International Energy Agency (IEA) cut its estimate of demand by 200,000 barrels per day to reflect the slowing US economy.

"If OPEC does follow through and cut, it's not very helpful to the market," says John Felmy, chief economist at the American Petroleum Institute in Washington. "Why cut at these prices?"

Mike Fitzpatrick, who heads up the risk management group at MF Global in New York, blames the latest spike on hedge funds or wealthy individuals buying energy futures as an inflation hedge. "The logic is that stock and bond markets are down, so the best bet is commodities," says Mr. Fitzpatrick.

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