Main Street
Oil: Worst-Case Scenarios
By Tara Kalwarski

(MONEY Magazine) – The surging cost of crude oil has pushed gas prices to record highs, and inflation anxiety is dragging down the stock market. Most oil watchers believe that prices will settle below $50 a barrel, but what happens if they stay in the high $50s or rise even further?

"We will feel it," says Mark Zandi, chief economist at He notes that since World War II, all major oil spikes but one have brought on a recession. The reason: Each sustained $10 increase in oil prices shaves almost a percentage point off growth. Current forecasts of an increase of 4% or more in gross domestic product assume oil at $45. A higher price, Zandi believes, means slow growth.

Not so fast, says Bank of America economist Lynn Reaser. "We are still making growth despite these prices," she notes. U.S. consumers spent $100 billion more at the pump in 2004 than in 2002, yet GDP growth improved. Plus our economy has become less oil dependent. Absent a disruption in supply, she says, oil will only dampen growth. But it's hard to imagine that if prices stay up, or climb higher still, investors will throw caution to the wind and bid up stocks.