Few observers expect rising energy prices to jeopardize the burgeoning U.S. economic rally. Rising crude oil prices are inflating prices for all refinery products, including gasoline and diesel, and such downstream petroleum-based goods as chemicals and plastics, says economist Gerald Cohen at Merrill Lynch & Co. in New York. But, "under current economic conditions, recent energy price increases aren't big enough to derail the recovery."

Energy price increases do damage by taking money out of consumers' pockets, squeezing business profits and raising prices throughout the economy as companies pass along higher materials and transportation costs to customers. Crude prices rose from $19/barrel in December to $24/bbl in March because of increased demand and reduced supply from OPEC . Then, rising tensions in the Middle East pushed the April price for West Texas Intermediate past $27. "If this had happened last fall or winter, it would have given me much greater concern," says Cohen. "Now, though, the U.S. economy is starting to stand on its own two feet, so higher oil prices are going to have less of an overall impact."

Petrochemical prices climbed only slowly during the early months of 2002 because demand growth remained moderate until April when stronger business activity at their companies inspired a flurry of purchasing activity among buyers of industrial chemicals and resins. The outlook for future buying plans also rose in April. In fact, PURCHASING's Forward Demand Index for chemical-consuming companies jumped to its highest level in more than two years—emboldening producers to seek substantial price hikes, which they blamed on rising energy costs. "The latest increases are due primarily to rapidly escalating costs of raw materials that are impacted by the current global pricing instability for crude oil and its petrochemical derivatives," says a spokesman for Ashland Specialty Chemical Co. in Dublin, Ohio.

Buyers aren't so sure that future prices will be substantially higher. The latest CPI PURCHASING survey finds only 8% of buyers actually agreeing to pay the higher prices. And the mavens tend to agree, noting that volatility continues to confuse the issue of real pricing trends. Weekly reports from the American Petroleum Institute on the level of crude oil and distillates stockpiles, for example, have begun to trigger increases or decreases in crude oil futures, depending on rising or ebbing of inventories.

So, mavens such as economist Bruce Cavella at DRI-WEFA in Lexington, Mass., expect the energy market to continue to show signs of pricing volatility even though there's no shortage of oil in the market. "The danger is not to the absolute supply/demand balance, but to the impact that fear will have on the industry's desired inventory levels," Cavella says. "If the major buyers of crude oil become concerned about where their next barrel is coming from, then the period of elevated prices will be sustained, at least for several weeks." That's why economist Maury Harris at UBS PaineWebber in New York says: "A potentially weaker economic recovery, if not a double-dip recession, could result from higher oil prices."

However, economist Laurence Ball at Johns Hopkins University in Baltimore pooh-poohs all the concern. "Most people think higher crude oil prices are a big deal," he says, "but, when economists try to quantify the effects, we don't get big numbers."

That's probably because the latest oil price increases don't match the explosive spikes that occurred during the three oil shocks that followed wars and political turmoil in the Middle East in 1973, 1979 and 1990. Reason: The nation isn't as dependent on oil as it was two decades ago. "We use essentially the same amount of oil today as we did in 1979, but our economy is twice as large," says Cohen.

Merrill Lynch calculates that for every dollar increase in the per-barrel price of crude oil, U.S. economic growth is reduced by $5 billion annually. In a $10 trillion-plus economy, that amounts to only 0.05%. So, the direct economic impact of higher oil prices isn't large enough, by itself, to knock the economy into recession, says Cohen. Also, economists at the Federal Reserve Bank estimate that a sustained $10/barrel increase in oil prices would cut economic growth by only 0.2%.

Higher oil prices could fuel inflation if gasoline, fuel oil, chemicals and plastics prices rise faster than the overall inflation rate. That could force the Federal Reserve to make a difficult decision between stimulating growth and fighting inflation. Still, Fed economists have figured that a sustained $10 rise in the cost of oil would boost the Consumer Price Index by just 1% over a three-year period. "So, the broader inflation implications are relatively benign—mainly because any shock would occur in a climate where existing pricing is bordering more on deflation than inflation," says economist Stephen Roach at the Morgan Stanley brokerage in New York.