(FORTUNE Magazine) – Have climbing oil prices and the budget fiasco made the economy more vulnerable to a recession? No question about it. But in FORTUNE's opinion neither event has dealt a mortal blow to the expansion yet. A shooting war certainly could. For now, though, the biggest threat is the effects that uncertainties about oil and the budget might have on the already parlous state of consumer and business confidence. So far the pessimism has not led to the kinds of cutbacks that could tilt the economy into a downward spiral. Consumers are still buying -- in September they spent more for cars, furniture, and eating out, among other things. One does have to assume that Congress and the Administration will get an agreement before their ineptitude makes a real difference to the business outlook. But you can add a new factor in trying to assess the budget's impact on the economy. The longer a stalemate with Saddam continues, the more it will cost the Defense Department to train, maintain, and augment the troops. The higher cost of fuel oil to the military would be a budget buster even without the extra needed for transporting reserves and regular soldiers. For the real economy, the additional spending may cushion some of the downside effects of budget cutting elsewhere, but it will add to the deficit.

The chart at left consists of rough estimates adjusting FORTUNE's forecast for oil-price scenarios developed by others. It shows that an average price of $40 per barrel to refiners -- which oil has hit recently -- would precipitate a recession if sustained for six months or so. Since FORTUNE first ran the chart in September, prices have averaged close to $35, raising the odds that they could remain high even without a hot war. Still, with two critical caveats -- no war, no severe winter -- oil prices should fall back by early next year. That will be soon enough that they won't stifle economic growth completely. The major OPEC countries, especially Saudi Arabia, have pledged to make up most of the shortfall from Iraq and Kuwait. And demand has already started to slow in response to the higher prices. With those caveats again, we expect refiners' acquisition costs to average about $25 per barrel next year, vs. $16 in this year's second quarter.

BOX: OVERVIEW

-- Spending is rising for cars and many other goods. -- Uncertainty will help keep the dollar down for a while. -- Oil markets have the jitters. But the fundamentals say prices should fall.

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