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January 6, 2008

Soaring oil prices likely to further impede growth

Soaring oil prices have added a new threat to the already slow U.S. economic growth and ignited fears that the U.S. economy could further slide into a recession, analysts said.

Oil prices hit a record high of 100.09 U.S. dollars per barrel (dpb) on the New York Mercantile Exchange on Thursday after crossing the psychological threshold of 100 dpb the previous day, the first trading day of 2008. ?

If the surge in oil prices is prolonged, U.S. consumer spending, which means more than two-thirds of overall economic activity, could be threatened. The United States consumes a quarter of the world's crude.

"If oil stays at the price it's at, you could see gasoline prices at 3.60 dollars or 4 dollars a gallon," said Paul Ashworth, senior U.S. economist at Capital Economics, a London-based research firm.

"It's going to have a fairly devastating impact," Ashworth was quoted by The Wall Street Journal as saying. High gasoline prices mean consumers have less to spend on everything else.

Rising oil prices are sending up the price of gasoline, the most visible price in the U.S. economy, and that has a major impact on consumer psychology.

Last week, the average retail price for regular gasoline in the United States jumped to 3.05 dollars per gallon, 71.9 cents above a year ago, the Energy Department said Thursday, adding the price might peak at over 3.4 dollars per gallon in the spring.

Data from Global Insight, an economic forecasting firm, shows what kind of impact higher oil prices will have on consumer spending and thus the whole economy.

Each 10-dollar-per-barrel increase in oil prices raises gasoline prices by roughly 19 cents a gallon, cuts growth in consumer spending by a third of a percentage point, reduces employment by 100,000 and adds one-half percentage point to consumer price inflation.

Those factors combined will subtract two-tenths of a percentage point from the already slow 1.1 percent pace of growth Global Insight predicts for the first half of 2008.

As gasoline prices rose in the spring and early summer, growth in consumer spending in the second quarter of 2007 plunged to an annual rate of 1.4 percent from the robust 3.7 percent in the first quarter.

Rising energy prices were also cited as a contributing factor in disappointing sales for the just-ended holiday season.

While most economists don't expect the oil spike alone to be enough to push the economy into a recession, they believe economic growth will be softened further.

Analysts now predict the growth rate to slow dramatically to an annual rate of 1.5 percent or even less in the final quarter of last year, down from 4.9 percent in the July-to-September period.

Soaring energy prices are likely to fuel inflation.

"Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation," said the Federal Reserve on Dec. 11 while announcing its third rate cut in three months.

Although U.S. inflation kept easing during most of the year as a result of the economic slowdown, consumer prices surged 0.8 percent in November, the fastest pace in over two years.

Even after excluding volatile energy and food, core consumer prices rose by 0.3 percent in the month, the biggest increase since January.

In this context, the U.S. central bank judges that "some inflation risks remain," and it will continue to monitor inflation developments carefully.

Added to this, the weakening dollar has the potential to help drive inflation up.

The situation would leave less room for the Federal Reserve to cut rates further, if needed, to prevent the economy from being dragged into a recession by the housing slump, credit crisis and high energy prices.

The current U.S. economy has a greater ability to endure than decades ago, when economic growth ended abruptly in the 1970s due to high oil prices.

The economy is now able to absorb the impact of surging oil prices better, despite the fact that the United States remains the most oil-dependent nation, analysts believe.

"Rising energy prices haven't harmed the U.S. economy as visibly as they did three decades ago, in part because of the economy's improved ability to absorb the shock," The Wall Street Journal said Thursday.

Manufacturers are more efficient. Vehicles get more out of every gallon of gasoline, and airlines and other transportation firms maintain aggressive programs to reduce their fuel expenses.

"The economy has performed well in the face of a huge run-up in energy prices," David Greenlaw, Morgan Stanley's chief U.S. fixed-income economist, said.

Courtesy Xinhua

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