$100 oil hurts, just like a recession

Economists, once so dismissive of pricey crude's economic impact, say it's going to hurt.

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By Steve Hargreaves, CNNMoney.com staff writer

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Economists say $100 oil is taking a big chunk out of consumer spending and helping pull the economy into recession.

NEW YORK (CNNMoney.com) -- Five months ago many economists said high oil prices wouldn't hurt the economy - now they're choking on their words.

Back in October, when oil prices were near $90 a barrel and the economy was still humming along economists said high oil prices shouldn't cut into economic growth. The economy used oil more efficiently than it did in the 1970s, and spending on gas was just a small percent of people's budget, the experts said.

Fast forward to March and you've got a sputtering economy, and economists saying $105 oil deserves a big part of the blame.

Even the White House is beginning to sound more pessimistic, predicting Friday that the the economy could contract.

"You have a very significant restraint on consumer spending," said Chris Lafakis, an associate economist at Moody's Economy.com, an economic consultancy. "It acts as a tax would."

Lafakis said consumers spend an extra $5 billion each year for each $1 increase in the price of crude.

When economists were predicting that oil wouldn't negatively impact the economy, they based their assertion on a price of about $80 a barrel.

But if oil stays at $100 a barrel for the next 12 months, consumers will have shelled out an extra $100 billion on oil by next year. That's an extra $100 billion not being spent at the mall, mega-mart or multiplex.

"The entire stimulus package could be drained by higher energy costs," Lafakis said, referring to the $120 billion lawmakers will refund to taxpayers in an effort to keep the economy out of recession. "That has the potential to turn a mild recession into something more dark."

Worse to come

Of course, high oil prices are not the only thing weighing on consumer spending, which accounts for about two-thirds of all U.S. economic activity. Declining home values mean people can't access cash through a home equity loan or profit from higher sale prices. In addition, the economy is shedding jobs, and unemployed people tend to spend less money.

"On its own, $100 oil wouldn't pull the economy into recession," said Beth Ann Bovino, a senior economist at Standard and Poor's. "But given the other factors, it's just another shoe to drop."

Both Bovino and Lafakis have similar predictions for the economy - a mild recession lasting the first and second quarters of 2008, then a modest recovery beginning in the second half of this year.

However, if oil goes to $115 or $120 a barrel - certainly not an outlandish thought given that crude prices have nearly doubled over the last 12 months - then those bets may be off.

Bovino said $115 oil, along with worsening conditions in the credit and foreign investment market, could be enough to keep the economy in recession through the first part of 2009.

"It would sure give the pessimistic forecast more credibility," she said.  To top of page

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