Gas Prices May Stall The Economic Recovery

Gas Prices - June 2009
Gas prices are on the rise again and some experts say that higher energy prices - along with rising mortgage interest rates - could stall the economic recover just as it's getting going.
Gas prices have been steadily rising in this country in recent weeks - echoing a spike last summer. They jumped another 17 cents in two weeks to a national average of $2.66 a gallon.

Could costlier gas - along with costlier mortgages - slow the economic recovery? CBS News correspondent Priya David reports.

Al Pankin's U.S. Auto School has been teaching Brooklyn how to drive for 65 years - or since gas was 36 cents a gallon.

But for his fuel-intensive business, when gas prices go up, profits go down.

"It's just going out the tailpipe of the car," Pankin said. "We're guzzling gas! The car is always in low gear - it's never on a highway, where if a cars supposed to get 25 miles to the gallon, we're getting 13. We're getting half."

Many small businesses and consumers are feeling the steady creep in the price of energy. Oil prices have doubled since the winter - from $34 to $72 a barrel.

And gasoline prices are up from a nationwide average of $1.62 a gallon in December to $2.66 this week, with parts of the country seeing $3 a gallon and beyond.

In part, the spike is seasonal, but it's also being driven up by investors who believe the economy is starting to improve. However, those higher prices could slow down the pace of any recovery before it even gets off the ground.

"When oil process dropped from $148 barrel down to under $40 a barrel, it added about $250 billion to house hold purchasing power in the United States," said David Wyss of Standard and Poor's. "The rise in oil prices over the last three months, has taken about a third of that back away."

High gas prices have discouraged Al Pankin from expanding.

"I have put a hold on hiring any new employees in my office," he said.

Another worry - rising mortgage rates. The interest rate for a 30 year fixed mortgage climed from about 5 percent to a peak of 5.81 percent in just two weeks - still historically low, but a spike which could cut off a burgeoning resurgence in the housing market..

"People are still a little concerned about their jobs, about the state of the economy right now," said Jay Bryson, a global economist for Wachovia. "I don't see them rushing out and buying a house. Perhaps they decide to wait until rates come back down again."

Like the price of oil, many believe the rise in mortgage rates reflects a resurgence in economic activity. But analysts warn if the costs to consumers and business increase too much, an already weak economic engine will stall.