$3.50 a gallon gas tends to concentrate the economic mind. With civil war raging in Libya, oil prices are spiking and it's natural to wonder what impact all this will have on our fragile recovery.
The damage depends on several factors. First, how big is the shock? A 20% increase has less impact than a 33% spike. Second, how long does the spike last? If Libya stabilizes quickly, the damage may be slight. Third, how efficient is the economy in using energy? As the President pointed out today, we now get way more economic output for a barrel of crude than we did back in 70s and 80s. Mr. Obama noted we use 7% less oil today than we did in 2005.
With all that in mind, the economic rule of thumb for the U.S. is that a 33% spike in prices might shave around 3/10ths of a percentage point off GDP in the first year and 1/2 a percentage point the second. In a $15 trillion economy, that is roughly $75 billion. Painful, but not insurmountable.
Of course, Libya is only 2% of world oil supply. If we have a bigger disruption, $3.50 gas may start to look cheap.
Source: http://www.pbs.org/nbr/blog/2011/03/oil_prices_and_the_economic_ru.html
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