12:13pm

Fri February 25, 2011
Planet Money

What Does $100 Oil Mean For The U.S.?

The price of oil rose above $100 a barrel yesterday in the U.S. It's fallen a bit today, but it's still about $10 higher than it was a month ago.

What do higher oil prices mean for the U.S. economy?

I asked Ian Shepherdson of High Frequency Economics, and he said the key impact is also the most obvious: Higher gas prices.

When oil goes up by $10 a barrel, the price of gas goes up by about 25 cents a gallon. That means people spend more money on gas. (Prices have to go up more, and stay up for a long time, before most people start driving less or shifting to more fuel-efficient cars.)

When people spend more money on gas, they spend less on everything else. So our economy grows more slowly. Shepherdson estimates that if the price of oil stays where it is now, our economy would grow by about 2.5 percent this year — down from his earlier estimate of about 3 percent, which was based on cheaper oil.

(Other experts see a smaller hit to the economy, by the way. The Fed says a $10 jump in the price of oil cuts economic growth by 0.2 percentage points, according to the FT.)

Slower economic growth is bad news, of course. But Shepherdson says $100 oil isn't enough to derail the economic recovery.

"My core message is, at this point don't worry about it," he told me.

If the unrest in the Middle East continues, and if the price of oil goes up a lot more — if it reaches $140 or $150 a barrel — the hit to the economy will be much bigger, and there will be a lot more to worry about, Shepherdson said. Copyright 2011 National Public Radio. To see more, visit http://www.npr.org/.