High oil prices could push the U.S. economy back into a recession, and even if they don't, they'll dampen growth, says Martin Feldstein, former chairman of the Council of Economic Advisors.
"It certainly could happen," Feldstein tells CNBC when asked if a recession were possible.
"It is certainly not the most likely outcome, but I think continued low growth held down by things like the high level of energy prices could give us a number much closer 2 percent (GDP) than the kind of 4 percent number that's being forecast — and it could be south of 2 percent."
While oil prices are a problem for consumers in the United States and abroad, the Federal Reserve is not to blame.
Monetary authorities have kept interest rates low and are printing money in order to spur more robust economic activity under a program known as quantitative easing, which weakens the dollar and sends investors racing to oil as a hedge.
|Martin Feldstein (AP photo)
Yet basic supply and demand is the culprit, says Feldstein.
"I think the strong demand in some places for oil like China and then all of the problems in the Middle East raise great uncertainties about what our oil supply is going to be worldwide," Feldstein says.
Nevertheless, soaring oil prices are acting like a tax on consumers here.
"The U.S. imports 4 billion barrels of oil a year, so a $40 increase in the price of oil, which is what we've seen since last year, that's $160 billion that American consumers are turning over to oil producers outside this country," Feldstein says.
"That's 1 percent of GDP, so it makes the fiscal discussion about $38 billion or $60 billion or $20 billion — those are small numbers in comparison to the $160 billion tax that the oil producers have put on us."
Further oil price hikes could do serious damage to the U.S. economy, OPIS chief oil analyst Tom Kloza recently told the Associated Press.
For consumers, "gas prices have more relevance on an emotional level than a lot of other things that they pay for," Kloza said. "People pay more attention to gasoline than phone service, cable TV or other services," Kloza said.
Kloza said it may not be long before the national average tests the all-time record of $4.11 per gallon set in July 2008.
"The surge in oil prices since the end of last year is already doing significant damage to the economy," says Mark Zandi, chief economist at Moody's Analytics, according to the Associated Press.
But a top Federal Reserve official said he expected commodity prices to stabilize and have a minimal effect on underlying U.S. inflation trends, even if costly fuel did put a dent on household budgets, Reuters reported.
Dennis Lockhart, president of the Atlanta Federal Reserve Bank, said historically, prices for industrial commodities "have tended to exert a relatively small effect on most consumer prices."
"This is not to say there will be no pass-through effect on inflation. The point is the effect is likely to be muted."
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