Gas prices: How much will they hurt the economy? (+video)

The fragile American economy has been painstakingly nursed back toward health with a variety of remedies, ranging from zero percent interest rates and extended tax cuts to the bailout of Detroit and controversial stimulus spending on roads, teacher salaries, and clean energy projects.

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Now, soaring fuel prices are threatening to undo it all.

Almost everyone from consumers tanking up the family car to the local pizza deliveryman to giant companies with fleets of cars is feeling it in the wallet as the national price of gasoline heads closer and closer to $4 a gallon.

The price at the pump is rising so quickly that the extra money Americans are spending is absorbing a significant amount of the payroll tax cut that Congress agreed to and President Obama signed into law Feb. 23 to help boost the economy. (For every 10-cent increase in the price of a gallon of gasoline, it costs the economy about $11 billion. By the end of February the price was up 36 cents for the year.)

Economists say if the price stays high for a good part of the year, it could stall the creation of jobs. And higher fuel prices could eventually start to have an unwelcome side effect: spiraling inflation.

"This rise in fuel price is a negative for the economy," says John Silvia, chief economist at Wells Fargo Securities in Charlotte, N.C. "The reality is transportation gets hit and the cost of goods goes up."

The hardest hit? Those drivers who live in the poorest states and those who travel the longest distances. (See map, at right.) However, the price of gasoline has probably risen fastest in California. Since Jan. 1, the price of regular gasoline in the Golden State is up 61 cents a gallon.

For the nation as a whole, some economists now anticipate the price of gasoline at the pump will exceed $4 a gallon by Memorial Day, the official start of the summer driving season.

"If oil prices stay where they are at the end of February [close to $107 a barrel], it means gasoline prices in April and May will be about $4.25 a gallon nationwide," says Mark Zandi, chief economist at Moody's Analytics in West Chester, Pa. "If we stayed there for the year, it would shave about 0.5 [percent] off of gross domestic product growth."

How much would that hurt the economy?

Mr. Zandi says this could result in the loss of 500,000 jobs. "It basically means we don't make any progress on reducing unemployment this year," he says.

However, it could be even worse. Moody's has constructed what Zandi calls "some dark scenarios," including one in which this summer the Iranians shut down the Strait of Hormuz, through which one-fifth of the world's crude oil moves. If that were to happen, Moody's computer models indicate the price of gasoline on a national basis would surpass $5 a gallon.

"That would push us into a recession," he says.

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