Gas prices will slow the economy's recovery, but not stop it. If gas prices rise to $4 a gallon, it could be a different story.
The turmoil in Libya hit American motorists hard on Friday.
The national average price of unleaded regular gasoline jumped nearly 6 cents from Thursday, according to the AAA’s daily fuel gauge report. Friday’s one-day rise in gas prices nearly matched the 7-cent increase that motorists had experienced during the previous six days.
So what does it mean for the economy? That depends on how the volatile situation works out. If Libya resumes full production – or Saudi Arabia and other producers step in with more supply – prices could easily go back down.
But if oil prices rise permanently by $10 a barrel, then it would take a toll on the economy. That price rise would add 24 cents to the price of a gallon of gasoline, increase consumers’ gasoline bill by $30 billion a year, increase the consumer price index (a measure of inflation) by 0.4 percent, and reduce Americans’ real disposable income by nearly nearly 0.3 percent, according to Nigel Gault, chief US economist for IHS Global Insight, an economic research firm based in Lexington, Mass.
The impact of that permanent rise would be noticeable but not disastrous. In a release, Mr. Gault projects that a permanent $10 a barrel rise in the price of oil in the first year would reduce inflation-adjusted economic growth and consumer spending by 0.2 percent, trim employment by 120,000, and cut vehicle sales by 180,000.
Some research suggests, however, that there are tipping points that could pack even more of an economic points. Perhaps $4 a gallon represents such a tipping point, says Gault. "At that point, the damage to growth would start shifting from an irritant to something worse."