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High Oil Prices, the Return of $3 Gas a Threat to the Economy

Douglas A. McIntyre

Crude oil prices are well over $63 a barrel, and some experts believe the next stop is $70. Over the past year, crude prices have been as low as $44, which has kept gasoline prices relatively low. If $70 becomes the new normal for a long period, $3 a gallon gas prices are just behind it. That cannot be good for the economy in almost all cases.

The price of an average gallon of regular nationwide is $2.50, up from $2.36 a year ago. The increase is not nearly as much as the jump in crude. However, since the prices move in close to lockstep, gas prices will rise soon.

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Gas prices are already above $3 in some places in the United States. This includes California, Hawaii and Alaska. Oregon has a few pennies to go to breach the $3 level. The price in New York, Pennsylvania and Connecticut are also close. Gas prices are still relatively low in states near the refineries south of Houston on the Gulf Coast. For example, the average price for a gallon of regular in Texas is $2.25. No matter how high gas prices go, the distribution across the country will be very uneven.

Among the things that could tighten supply is OPEC keeping production levels low or a major supply interruption elsewhere. Friction between the United States and large oil producer Iran could cut supplies. Some of this comes from the president's comments about relationships between the two countries. His comments about North Korea also have raised the specter of an ugly international incident that could spike oil prices. As a matter of fact, the president may represent the single greatest upward pressure on crude. On the other side of the equation that determines prices, a strengthening global economy will move demand for crude higher.

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It has been about 30 months since U.S. gas prices last hovered just below $3. Economists expressed concern then that consumer spending could be threatened. This is particularly true for people who need to drive any substantial distance each day, and worse in the high gas price states. Since consumer spending is over two-thirds of gross domestic product, the current strong American economy faces a gas price risk.

Oil needs to move up less than $10 for gas to reach $3, and then problems with the American economy to become much more likely.

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