Higher oil prices would hamper global economy

WASHINGTON (AP) — Just as the US and global economies are finally strengthening, they face a new danger: Rocketing oil prices, which topped $100 a barrel Wednesday.

The US economy can likely absorb $100 oil and keep expanding, even though gasoline prices would rise further and growth would slow. But it would hurt.

Gasoline for US motorists already costs more than at any point since 2008, despite fairly modest demand and ample US supplies.

The national average for a gallon of unleaded gasoline was $3.19 (84 cents a liter) on Wednesday — 53 cents more than a year ago.

Analysts expect the average to range between $3.25 and $3.75 a gallon this spring.

Oil prices had been rising for months, but they jumped this week as violence gripped Libya. Analysts say any production declines in Libya could likely be absorbed by other producers like Saudi Arabia.

Libyan oil accounts for less than one percent of US crude imports.

Still, regional turmoil can still raise the price of oil, regardless of the source. Analysts say concerns about violence in North Africa and Middle East have put a “fear premium” that’s added about $10 a barrel.

Consumers and businesses would feel pinched by $100-a-barrel oil — and not just motorists. Stock prices, which have lost more than two percent this week, could sink further. That would reduce household wealth and consumer confidence. As fuel costs price rise, so would prices for travel services and products containing plastics.

Air travelers would pay more. This month, several airlines tacked on fuel surcharges - extra fees that help cover fuel bills.

Surcharges had nearly disappeared after fuel prices tanked in late 2008.

Since then, rising oil prices have pushed jet fuel close to $3 a gallon. Fuel accounts for roughly one-third of the budget for US airlines, up from less than one-fifth a decade ago. Fitch Ratings analyst William Warlick said if jet fuel reaches about $3.20 a gallon, “the whole industry will be challenged to stay profitable.”

Airlines may soon decide to eliminate some flights and ground older jets to cut fuel consumption, Warlick said. Delta Air Lines has already scaled back plans to add flights this year.

Analysts estimate that over a year, $100 oil would reduce US economic growth by two or three of a percentage point. So rather than grow an estimated 3.7 percent this year, the economy would expand 3.4 percent or 3.5 percent. That would likely mean less hiring and higher unemployment.

The global economy wouldn’t be affected as much. In part, that’s because emerging economies consume less oil, per person, than industrialized countries do. Global growth would slip about one percentage point, economists said. In addition, many developing countries regulate or subsidize the cost of gas.

But oil prices around $100 a barrel pose a risk for European economies, many of which are net importers of oil and gas, haven’t fully recovered from the financial crisis and face heavy debt loads. Spain and Italy, for example, where gas at the pump already goes for about $8 a gallon ($2.11 a liter), face years of a slow, grinding recovery. A spike in oil would deal their economies another setback.

Pricier oil would also push up inflation in Europe, where it already exceeds official targets, and in countries with surging food prices, like China, Brazil and India. Those countries might then have to raise interest rates to cool inflation. Doing so, in turn, would slow growth in Latin America and Asia.

A darker possibility — one that few analysts expect - is that oil prices will keep rising until they reach $150 or more and then stay there for months. Under that scenario, another recession is possible, economists say.