Market Insider

When oil was climbing past $50, $60, $70 and even $80 a barrel, the big question was: Where is the breaking point for the economy?

Now with the economy staring down a recession (or in a recession, depending on your view), oil is at $110 per barrel. And some economists are saying the price is now beyond that breaking point -- and the duration of higher prices and the resulting impact on gasoline prices will be a big factor in the economy's ability to shake off its sluggishness.

"The only reason the economy hasn't visibly broken is that gasoline prices haven't risen commensurately with oil prices, but that's coming," says Mark Zandi, chief economist of Moody's Economy.com.

Deutsche Bank chief U.S. economist Joe LaVorgna and Zandi both told me in recent discussions that rising gasoline prices threaten to wipe out any benefit that could come from Washington's $100 billion plus stimulus package.

"According to my calculations, for every one penny rise in gasoline, households spend about $1 billion (per year) on energy. If you take gasoline and go from say, $3 a gallon to $4 a gallon, which fact is a risk, you basically take your $100 plus billion tax cut and it goes into energy," Lavorgna said.

If that happens, "What we'll do is take the tax rebate and put it in our gas tanks," said Zandi.

Of course, LaVorgna says, if gasoline prices were to start to fall it would be like an instant bonus to households. "That would lower the cost of doing business and that would restore real purchasing power," he said.

Yesterday, the Energy Information Administration said retail gasoline pump prices, now $3.225 a gallon, are likely to top out at $3.48 a gallon nationwide in May. The EIA also said it is likely gasoline will pass $4 per gallon in some markets though the summer average will be under that level.

Oil Wednesday closed at $109.92 per barrel, driven higher by a record low dollar. Oil pushed through $110 per barrel in the after hours electronic session.

"It's now a financial market driven by speculation, a developing bubble. So like all bubbles, it can get a lot bigger before it breaks," Zandi said.

Traders say there's a new breed of buyer in the market, pension funds and other typically more conservative institutions are buying alongside hedge funds.

LaVorgna says he currently expects third quarter GDP to get a bump from the stimulus package, but he may review that if gasoline keeps rising. He said he thinks the breaking point for the economy was $100 per barrel oil.

Cambridge Energy Research Chairman Dan Yergin wrote us late yesterday about oil's runup; he raises an interesting point.

"It's strange. There seemed to be more concern about the impact of oil on the economy when oil was $70 than when it is over at $100 or at $110. Yet we seem now to be in oil shock territory. Prices at this level are at a heavy weight on an economy already under great pressure and a big issue both for consumers and many businesses," said Yergin, CNBC's energy analyst.

Questions?  Comments? 

Tools:

PrintEmail

Next Post

Previous PostBack to Main Page

• 

CNBC HIGHLIGHTS

» More: Blogs | Slideshows | Special Reports | Top Video

• 

• Buffett & Gates Talk At Columbia 

• Warren Buffett and Bill Gates spoke to Columbia students, and Buffett made the students a startling offer.

• 

• The Roberts Way 

• For the chief of cable company Comcast, growth has been about making deals – generally very large deals.

• GE Talks Go Slowly 

• 

• Carbon Insurance 

• Some companies may start using insurance to shift carbon risk from their balance sheets to maybe... yours?

• 

• Acai In The Big Box 

• The president and founder of Genesis Today wants to improve America’s health, and thinks Wal-Mart can help.

• 

• Swiss Sue Google 

• Switzerland's privacy watchdog is taking legal action to force Google to make changes to its Street View service.

• 

• Bugatti in the Drink 

• A wealthy, distracted Texas driver crashed his million-dollar Bugatti Veyron sports car into a salt marsh, say police.

COMMENTS

More Comments

 

« First | « Previous

Next » | Last »

Thank you for joining our discussion. Your comment has been posted.

ADD COMMENTS

Please Sign In or Register to participate.

In order to add a comment you must click here and accept our terms and conditions.

Edit Screen Name

Please sign-in/optin or register to be able to submit comments.

Remaining characters

CNBC welcomes your contribution. Please respect our community and the integrity of its participants. CNBC reserves the right to moderate and approve your comment.

PREVIEW COMMENT

Your comments have not been posted yet.
Please review your submission to make sure you are comfortable with your entry.

Your Comments: