Rising Oil Prices Pose New Threat to U.S. Economy #p2

This article is by Motoko Rich, Catherine Rampell and David Streitfeld.

The American economy just can't catch a break.

Last year, as things started looking up, the European debt crisis flustered the fragile recovery. Now, under similar economic circumstances, comes the turmoil in the Middle East.

Energy prices have surged in recent days, as a result of the political violence in Libya that has disrupted oil production there. Prices are also climbing because of fears the unrest may continue to spread to other oil-producing countries.

If the recent rise in oil prices sticks, it will most likely slow a growth rate that is already too sluggish to produce many jobs in this country. Some economists are predicting that oil prices, just above $97 a barrel on Thursday, could be sustained well above $100 a barrel, a benchmark.

Even if energy costs don't rise higher, lingering uncertainty over the stability of the Middle East could drag down growth, not just in the United States but around the world.

"We've gone beyond responding to the sort of brutal Technicolor of the crisis in Libya," said Daniel H. Yergin, the oil historian and chairman of IHS Cambridge Energy Research Associates. "There's also a strong element of fear of what's next, and what's next after next."

Before the outbreak of violence in Libya, the Federal Reserve had raised its forecast for United States growth in 2011, and a stronger stock market had helped consumers be more confident about the future and more willing to spend.

But other sources of economic uncertainty besides oil prices have come into sharper focus in recent days. After a few false starts, housing prices have slid further. New-home sales dropped sharply in January, as did sales of big-ticket items like appliances, the government reported Thursday.

Though the initial panic from last year has faded, Europe's deep debt problems remain, creating another wild card for the global economy. Protests turned violent in Greece this week in response to new austerity measures.

Budget and debt problems at all levels of American government also threaten to crimp the domestic recovery. Struggling state and local governments may dismiss more workers this year as many face their deepest shortfalls since the economic downturn began, and a Congressional stalemate over the country's budget could even lead to a federal government shutdown.

"The irony is that we just barely got ourselves up and off the ground from the devastating financial crisis," said Bernard Baumohl, chief global economist at the Economic Outlook Group, who had been optimistic about the country's prospects. "The recovery itself is less than two years in, and we haven't yet seen jobs make a decent comeback. Now we're being hit with this new, very ominous event, so the timing couldn't be worse."

rest at http://www.nytimes.com/2011/02/25/business/economy/25econ.html?src=busln