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Soaring Oil Prices Seen as Weighing on US Economy

Recent figures show the U.S. economy expanding at a healthy and sustainable rate of 3.4 a year. But just how sustainable America's economic recovery proves to be could be determined, in large part, by energy prices. Crude oil closed above $65 a barrel in New York trading last Friday - up 50-percent for the year so far. Most economists see high oil prices as a drag on the economy, but how big a drag is a matter of debate.

It is difficult to imagine a sector of the economy that is not, in some way, affected by oil prices. Whether transported by sea, air or road, virtually all products get to market thanks to fossil fuel-powered vessels and vehicles. Petroleum products are used extensively in manufacturing everything from plastics to synthetic fabrics. And ordinary people use gasoline to power their cars, lawn mowers and other machines.

Many Americans see it as ominous therefore, that, in much of the country, they are paying close to $3 a gallon - or about seventy-five cents a liter -- for high-grade gasoline. That is more than double the price of two years ago. And Americans are paying in other ways, as well. To defray energy costs, airlines are imposing a fuel surcharge on tickets. Many shipping companies are imposing a similar surcharge.

All of this has some economists worried that energy prices will choke U.S. economic growth. Speaking on CBS's "Face the Nation" television program, former Labor Secretary Robert Reich said fuel costs are but one factor Americans should be watching.

"There are three storm clouds on the horizon, one of which is oil prices. Another is a potential housing market bubble that bursts, and the third is the deficit," said Mr. Reich. "The federal deficit, and also Americans' inability to save."

The former Chairman of the White House Council of Economic Advisors, Glenn Hubbard, sees the same data, but reaches a different conclusion: that high energy prices, the costs of war and other factors are testing the resilience of the U.S. economy. Also speaking on CBS, he says, so far, the economy is responding remarkably well, and will likely continue to do so.

"I think the chances of a recession from this are remote. In fact, the third quarter [of the year] is likely to be a blow-out [extremely good] for the U.S., with real GDP [gross domestic product] growth about four-percent," explained Mr. Hubbard. "I do think we [the economy] will slow, in part because of higher energy prices, after that - but still to modest growth."

Even so, economists note that, historically, U.S. economic downturns have been preceded by some sort of energy crisis, or what have been referred to as "oil shocks."

Speaking on the "Fox News Sunday" program, South Carolina Senator Lindsey Graham said the United States must consume less gasoline and boost domestic drilling for oil, including in Alaska's environmentally-sensitive Artic National Wildlife Refuge, or ANWAR.

"We need to have a strategy of domestic drilling. We should drill in ANWAR," said Senator Graham. "We need to develop cars that operate on something other than gasoline: electric cars, hydrogen cars, electric cars."

But New Mexico Governor Bill Richardson, who formerly served as U.S. energy secretary, says more domestic oil drilling is not the answer.

"I think the ANWAR argument is ridiculous - that is such a minor component of our energy security, much less than one-percent," said Governor Richardson. "What we want to see is a Marshal Plan, not an energy bill, a Marshal Plan where the president says, 'our Number One priority is to reduce our dependence on foreign oil."

Experts say the price of gasoline may actually subside in coming weeks, as the U.S. summer - when many Americans go on vacation - comes to an end, and demand for gasoline wanes. Months later, fuel costs could spike once again, as demand for winter home heating oil goes up.