Spiking Energy Prices Could Threaten Recovery

Oil prices have climbed by 27% in the past year, climbing 10% in the past month alone. As of March 2, prices for light crude U.S. oil hit $101 per barrel. Retail gasoline prices have increased 25% over the same time period, including 19% in the past month alone, and as of the last week of February they averaged $3.38 per gallon for regular grade and as high as $3.72 per gallon in California. Many believe that we will reach $4 per gallon by this summer. Food prices are also climbing sharply due, in large part, to weather conditions, thus compounding the squeeze on consumers.

As recently as a month ago, when oil hovered in the high $80s per barrel and gasoline was in the high $2.80 per gallon range, it appeared that in 2011 the nation’s GDP would grow by 3% to 3.5%, enabling job growth of two million to 2.5 million (+1.9%), up from 1 million or 0.8% in 2010. This projection will be reduced moderately with GDP taking a 0.5% to 0.75%. hit, assuming that oil stabilizes in the $100-per-barrel range and gasoline prices level off in the mid $3-per-gallon range. However, if oil should climb to $150 per barrel, and gasoline reaches the mid $4-per-gallon range, it would lower the GDP projection by approximately 1.7 percentage points and the job projection to approximately one million. This is because every $10 per barrel sustained increase in oil causes an annual decline in the GDP of approximately 0.25%. If a worse-case scenario comes true (oil reaches $175 per barrel, for example and gasoline reaches $5 per gallon), the formula says the GDP would drop to approximately 1.4% and job growth would approach zero, or the addition of only 400,000 jobs.