Gasoline prices looming threat to economic recovery

One of the first lessons in economics classes is the question of guns vs. butter. An nation's economy can invest in defense, guns, or it can invest in butter, consumer goods and services.

Household economies aren't much different, although thankfully, most of us don't have to invest that much in home defense.

We do, however, have to make the same choices -- do we spend our discretionary resources on milk or a movie? Buy a new refrigerator or go on a vacation?

When the squeeze comes, as it inevitably does, there are only a certain number of places where we can respond. Some things we can cut out completely -- that vacation, perhaps -- but others can be affected by changing habits.

Gasoline is one of the latter, although workers with a significant commute would beg to differ.

We're probably about to find out just how much we can adjust our gasoline consumption to leave room for the rest of our budget.

Gasoline prices rose 14.1 cents a gallon in the week ending Sunday, averaging $3.64 across the state.

Nebraskans are paying 24.5 cents per gallon more than they were a year ago, and 36.4 cents more than a month ago. Nationally, gasoline is up 45 cents a gallon since Jan. 1, and is the highest it's ever been at this time of year, an average of $3.73 a gallon.

Some Nebraska officials have been touting our relatively strong economy, but a jump in gas prices, especially if it's combined with other factors slowing down the booming farm economy, could derail the recovery in a heart beat.

Observers will be surprised if gasoline doesn't continue to climb, both from seasonal demand and from the ever-present threat of trouble in the Middle East.

The role of gasoline in the U.S. economy is surprising. Carl Riccardonna, senior economist at Deutsche Bank, told the Associated Press that a rule of thumb is that a 25-cent increase in gasoline prices knocks $25 billion to $30 billion off consumer spending in a year and lowers economic growth by 0.2 percent.

Economists think the economy will grow at a 2.2 percent annual rate for the first half of the year, but a blockade at the Straits of Hormuz could throw all predictions out the window. Should Iran block that choke point, through which 20 percent of the world's oil flows, Wall Street observers think the price of oil could top the $145 record it set in 2008.

That could push gasoline over the all-time record of $4.11 a gallon, costing households hundreds of dollars they would otherwise spend on other goods and services and slowing or reversing any economic recovery.

Southwest Nebraska is especially vulnerable to the effects of higher fuel prices, since nearly everything we buy gets here through the burning of petroleum products. And, much of the local economy depends on those same products as fuel for agriculture and agricultural inputs such as fertilizer.

Until we reduce dependence on foreign oil, especially that which flows from the Persian Gulf, we will find our economy, and our family life, at risk of disruption by international turmoil beyond our control.