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Fuel prices' toll on U.S. economy

A $10 increase in the price of a barrel of oil can lower GDP by about 0.2 percent.

By Ron SchererStaff writer of The Christian Science Monitor / May 27, 2008

Memorial Day weekend: High oil prices are pinching wallets, but boaters were still in evidence at the Cypress Black Bayou Recreation Area in Louisiana.

Mario Villafuerte

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New York

Obviously, the sharp rise in the price of oil – $80 a barrel higher than a year ago – has major, negative consequences for the economy.

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Every time the local gas station raises the price at the pump, consumers' wallets are getting pinched – something that could affect impulse purchases this summer, such as for ice cream or jewelry. At the same time, businesses are trying to pass on their higher costs for everything from PVC tubing to steel bars. Such changes may go beyond the short term: Some Americans are now making lifestyle changes, most of them involving belt-tightening.

Economists are divided, however, over whether the price of oil has skyrocketed enough to push the economy into a recession. The optimists see Americans making adjustments, scrimping when they can to make up for the extra cost of gasoline.

"The economy is still growing," says Richard DeKaser, chief economist of National City Corp. in Cleveland. "There is nothing magical about $130 [a barrel] oil. It's just more of a drag, more intense."

The pessimists say that the rise in energy prices is coming too fast and that the US economy is now in an "oil shock" downturn.

"For the average American, we are in a recession," says Mark Zandi, chief economist for Moody's "They are worth less than last year; their purchasing power has evaporated; they are past the breaking point."

Every $10 increase in the price of a barrel of oil lowers America's output of goods and services (known as the gross domestic product) by about 0.2 percent, economists calculate. This means that the economy has lost 1.6 percent in the past year due to the rise in oil prices. Since January, oil prices are up nearly $40 a barrel, or 0.8 of the GDP. The fiscal stimulus package passed by Congress was intended to add about 1 percent to GDP.

"We have been struggling against a severe headwind, and the latest developments suggest the headwind is increasing," Mr. DeKaser says.

Consumers notice rising energy costs the most when they fill up the family car. Since Jan. 1, gasoline prices are up 89 cents a gallon, according to "Every penny increase in a gallon of gasoline costs American consumers [collectively] just over $1 billion over the subsequent year," Mr. Zandi calculates.

In surveys, the Gallup Organization has found different gasoline prices that were "tipping" points for consumers. The first one was $3 a gallon (the United States hit that about Jan. 1). The next one is $4 a gallon, which is only 8 cents above last Friday's price, according to

"The degree at which they adjust their lives increases as we hit those prices," says Dennis Jacobe, chief economist at Gallup in Washington. "For example, shopping behavior changes considerably. There is less impulse buying, and people don't go out as much for weekend activity."