Oil hits high, yet economy hums

Oil prices yesterday reached another record high, raising concerns that at some point -- no one quite knows when -- the cost of energy will create a serious burden for the economy.

The price of a barrel of oil briefly touched $65 before closing at $64.90, up $1.83 for the day. Oil prices have climbed 54 percent since the start of the year. Nationally the average pump price for gasoline rose to a record $2.37 a gallon yesterday, the American Automobile Association said.

Oil prices rose after a government report showed that strong demand for gasoline cut into the nation's inventories. But Thorsten Fischer, an energy specialist with Economy.com, a Pennsylvania forecasting firm, said the steadily rising price of oil can't be explained by simple supply and demand.

''Geopolitical concerns are taking over," Fischer said. He blamed Saudi Arabia's decision this week to close the US Embassy and Iran's refusal to abandon its nuclear program as catalysts for the latest jump in prices. Refinery shutdowns have also created nervousness in the market, energy traders said.

So far, expensive energy has not had much impact on the economic expansion. The US economy grew at a healthy 3.4 percent in the second quarter and most forecasters expect even stronger growth for the rest of 2005. Analysts say there are a variety of explanations for why high energy prices have not done more damage.

For one thing, the economy is less energy-intensive than it was a generation ago. Put another way, it takes less energy to create a dollar of output. Conservation by consumers and businesses has contributed to that change. So has the decline of heavy manufacturing. Once a big user of energy, manufacturing represents a smaller slice of the economy than it once did.

The timing of the current price increases is also significant, economists say.

In past energy price run-ups -- in the early 1980s and the early 1990s -- higher oil prices hit an economy that was already weakening. The most recent surge in prices has coincided with a solid expansion. Expensive energy is still a negative, but it is not enough of a negative to overcome the benefits of good job growth, low interest rates, and decent consumer confidence.

''We may not be happy about energy, but we are coping with it," said Nigel Gault, chief US economist at Global Insight, a Waltham forecasting company.

How high would energy prices have to go for the negatives to overwhelm the positives?

''I don't believe there is a bright red line out there that we can't cross," said Richard DeKaser, chief economist at National City Corp., a bank based in Cleveland. DeKaser said that every $10 increase in the price of oil shaves roughly a half a percentage point off the economy's growth rate. His analysis suggests higher oil prices would slow but not derail the economy. Oil at $100 a barrel, he said, might be enough to trigger a recession.

Gault also used the $100 figure as a possible breaking point, but said a price shock -- a sudden spike caused by a political crisis or a terrorist attack -- could deal a heavy blow to the economy, even if prices didn't reach $100.

Economy.com has forecasting models that show that several months of oil at $70 to $80 a barrel would be enough to short-circuit the recovery. But analysts there yesterday conceded the US economy might be more resilient than they realized and that it might take even higher prices to create a recession.

Energy prices act much like a tax, draining money from the pockets of consumers and businesses. Industries such as airlines have suffered disproportionately because they have been unable to pass on higher energy prices to passengers. Low-income consumers also get hurt because energy represents a large percentage of their weekly budgets.

Charles Stein can be reached at stein@globe.com.