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Oil Prices: How Big a Threat?


With one eye on Iraq and the memory of Kuwait's fiery oil wells still burning bright in their memories, some economists say the U.S. is set up for an energy crisis of historic proportions.

Economists are watching crude-oil prices -- which recently topped $37 a barrel, their highest level in more than two years -- with much hand-wringing.

"Whenever we've seen oil prices approach $40 a barrel and stay there a couple of months, we have had a high risk of a new recession. The $37 is definitely raising eyebrows," says Lakshman Achuthan, managing director of the Economic Cycle Research Institute in New York. "It's not so much the number, it's whether it persists at those levels. If oil approaches $40 and stays there for two months, the risk of GDP being negative is high."

That overused word of late, "uncertainty," permeates talk of how action in the Middle East may affect oil supply and prices. During the Gulf War, Saddam Hussein's retreating troops set the country's wells ablaze, making more than one billion barrels of oil go poof.

Even Americans who aren't glued to CNN as events unfold in Iraq can't escape geopolitical issues. It's common knowledge that higher oil prices act like an additional tax on consumer spending -- put simply, when that whole $20 bill goes to fill 'er up, there's nothing left over to spend on beef jerky or a six pack of Schlitz at the Kwik-E-Mart. Gas prices are currently at $1.66 and rising, according to the U.S. Energy Information Administration.

Increased heating-oil prices also take a bite out of household budgets, and in the densely populated Northeast, this winter has been bone-chilling (in case you're a stickler for numbers, January here in the New York area was 32% colder than last year, the EIA says).

None of this is good news considering that the American economy has relied entirely on the consumer to keep it limping along the past year; businesses are still mostly in bunker mode, awaiting better earnings visibility. Should consumer dollars suddenly start to dry up, it would be dire for the economy.

Meanwhile, a nasty confluence of events has some who watch oil markets predicting supply disruptions much like those in the 1970s.

Besides the expected war in Iraq, a strike in Venezuela -- the world's fifth-largest exporter of oil -- has capped supply. Economists point out that U.S. dependency on foreign oil is near an all-time high, and inventories are near record lows.

Meanwhile, the U.S.'s economic picture is much different this time around than it was during previous supply disruptions. Unlike the two crises in the 1970s, we are stuck in a period of slow economic growth; should things pick up, oil prices could remain stubbornly high.

"If the [Iraq] war is quick, you have a much stronger economy at year's end. You'll have stronger demand [for oil], and it's unlikely to fall that much," says ECRI's Mr. Achuthan. "But if the war drags out, you have geopolitical issues keeping oil prices high, even though demand slips. In both cases it doesn't seem like you have a huge plunge."