Tags: us | economy | gasoline | gas | crude | recovery

Increasing Pain at the Pump Could Stall Economic Recovery

Thursday, 10 Mar 2011 01:24 PM

By Newsmax Wires

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Economists warned that the recent surge in fuel prices will eventually hurt the fragile economic recovery, while the Energy Department predicted that the average U.S. household will spend about $700 more for gasoline in 2011 than it spent last year.

Higher gasoline prices will give consumers less money to spend on other goods and services, which many economists fear could slow the U.S. economy.

So far, fuel prices haven't slowed consumption, but economist Michael Lynch told the Associated Press that drivers and businesses may start cutting back, if oil remains above the $100 per barrel level.

"We're past the point of, 'Oh, it's only going to be up for a few days,'" Lynch said. "I think people are already starting to change their behavior, and they're modifying their vacation plans as we get closer to the summer."

The Energy Department warned this week that U.S. drivers will pay another 10 cents a gallon for gasoline before the latest jump in wholesale costs is fully passed on at the pump, and yearly motor-fuel costs will rise 28 percent from last year, Reuters reported.

The average U.S. household will spend about $700 more for gasoline in 2011 than it spent last year, bringing total motor fuel expenses up 28 percent to $3,235, based on an annual pump price of $3.61 a gallon, the department's Energy Information Administration said.

Retail gasoline prices soared by 38 cents over the last three weeks to $3.52 per gallon, according to the EIA, because of high crude oil costs due to unrest in the Middle East.

"Because the pass-through of changes in wholesale gasoline prices to the retail level is lagged, pump prices would be expected to rise a further 10 cents per gallon to fully reflect the current wholesale price level even without considering any future wholesale price movements," the EIA said in its weekly review of the oil market.

The EIA said it expects drivers will pay an average $3.71 a gallon during the summer peak driving season from June through August, about 98 cents more than last year.

There is a 25 percent chance the pump price will exceed $4 a gallon from June through August, the agency said, compared with a 10 percent probability gasoline could fall below $3 during the same period.

Meanwhile, news that forces loyal to Libyan leader Moammar Gadhafi were poised to recapture the strategic oil port of Ras Lanouf from opposition forces sent oil down nearly 3 percent to $101 a barrel, well below the high of nearly $107 a barrel it reached on Monday.

Benchmark West Texas Intermediate for April delivery fell $3.06, about 3 percent, to $101.32 per barrel in midday trading on the New York Mercantile Exchange. In London, Brent crude lost $1.80 at $114.14 per barrel.

Dismal global and U.S. economic news Thursday helped fuel the oil sell-off. China, which is expected to drive increases in oil demand for years to come in its growing economy, reported overnight that surging oil and commodity prices produced a surprising trade deficit of $7.3 billion for February. And the U.S. Labor Department reported that the number of people seeking unemployment benefits rose last week.

Oil prices started rising since late last year, as investors anticipated new tax cuts and gasoline demand increased. They soared above $100 per barrel last week as the Libyan uprising essentially shut down the country's exports.

"When you've risen as quickly as we have, there's always going to be a risk of a big drop when you hear stories that say the world isn't as wonderful as you think," Tom Kloza, publisher and chief oil analyst at Oil Price Information Service, told the AP.

The plunge in oil prices Thursday helped push oil company shares lower as well. Exxon Mobil Corp., Chevron Corp., BP, Total, ConocoPhillips, Occidental Petroleum Corp., and Royal Dutch Shell all fell 3 percent or more.

The oil industry has tried to ease concerns recently, saying the rise in prices was mostly due to speculation and there's still plenty of crude to meet world demand. But investors continue to worry about future supplies.

Although Saudi Arabia and other OPEC members have said they will cover any shortfall from Libya, the wave of unrest in North Africa and the Middle East will make it harder to crank up production if another crisis affects shipments elsewhere, traders said.

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