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Economic risks of high oil prices

Energy is credited as a factor behind slower than expected second-quarter GDP. Most experts see prices staying high.

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Record-high oil prices signal new danger to the economy, as rising costs ripple into everything from floral deliveries to the production of plastic toys and orange juice.

Crude-oil costs of $50 per barrel suddenly don't seem far-fetched, not in a week that has seen costs top $44 for the first time in 21 years of government reporting.

Experts differ on how much the recent spike is affecting economic growth - and whether the current US expansion is now at risk. But at the very least, consumers and businesses face a new headwind.

Already, rising energy costs have been tagged as a factor behind a slackening of consumer spending. Growth in the nation's gross domestic product (GDP) expanded at a slower-than-expected 3 percent annual pace from April to June, down from a 4.5 percent rate for the year's first quarter.

Today's economy is in some ways insulated from the oil factor. Equipment in factories and appliances in homes have become more energy efficient. Commerce in a service economy happens increasingly over fiber-optic cables rather than roads.

But oil still matters. Consider that each recession in recent decades was preceded by a rise in oil prices. Today's spike hits hardest for airlines, truckers, and people who drive a lot. But few sectors of the economy are wholly unaffected.

"It's a very tight market. There's just no excess capacity out there. And there is a lot of uncertainty," says Mark Baxter, director of Southern Methodist University's Maguire Energy Institute in Dallas. "And going into the election, naturally President Bush doesn't want to see [slower economic growth]. But the problem is, there is no short-term fix before November."


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