Where Is The Economy’s Breaking Point?

When oil was climbing past $50, $60, $70 and even $80 a barrel, the big question was: Where is the breaking point for the economy?

Now with the economy staring down a recession (or in a recession, depending on your view), oil is at $110 per barrel. And some economists are saying the price is now beyond that breaking point — and the duration of higher prices and the resulting impact on gasoline prices will be a big factor in the economy’s ability to shake off its sluggishness.


“The only reason the economy hasn’t visibly broken is that gasoline prices haven’t risen commensurately with oil prices, but that’s coming,” says Mark Zandi, chief economist of Moody’s Economy.com.

Deutsche Bank chief U.S. economist Joe LaVorgna and Zandi both told me in recent discussions that rising gasoline prices threaten to wipe out any benefit that could come from Washington’s $100 billion plus stimulus package.

“According to my calculations, for every one penny rise in gasoline, households spend about $1 billion (per year) on energy. If you take gasoline and go from say, $3 a gallon to $4 a gallon, which fact is a risk, you basically take your $100 plus billion tax cut and it goes into energy,” Lavorgna said.

If that happens, “What we’ll do is take the tax rebate and put it in our gas tanks,” said Zandi.

CNBC