updated 11/1/2007 5:59:18 PM ET 2007-11-01T21:59:18

As oil prices climb toward the once unthinkable $100 a barrel level, fears that the U.S. economy could tip into recession are also rising.

To spur spending and borrowing, the Federal Reserve on Wednesday cut a key short-term interest rate for the second time in two months. This, even after the economy grew at a respectable 3.9 percent annual rate in the third quarter and fuel demand continues to rise. So what gives?

Anxiety-inducing headlines can cloud reality, analysts said, especially when it comes to a critical commodity such as oil, whose economic impacts are best measured over time. Through October, the average per-barrel cost of oil is only 1.3 percent higher than during the same period in 2006, and motorists have paid just 3 percent more per gallon on average at the pump.

To be sure, the strain of higher oil prices is being felt, particularly among fuel-intensive businesses and poorer Americans, who spend a higher percentage of their income on energy than the rest of the population. But the recent surge in oil prices comes on the heels of a multiyear run-up, and that has given the overall economy time to adapt, analysts said.

Oil prices — which zipped past $96 per barrel Thursday — would need to surpass $100 a barrel and remain at that level for at least two weeks or more to inflict widespread and lasting economic damage, says Tyson Slocum, director of the energy program at consumer group Public Citizen in Washington.

"Short little jumps aren't going to do it. It will have to be sustained over time," he added.

Fortunately, the consensus view on Wall Street is chances are slim that oil will surpass $100 a barrel and stick for any length of time.

A severe housing slump and attention-getting credit crunch are tapering U.S. economic growth, which will trim energy demand and bring prices down to around $70 to $80 a barrel, predicts Fimat analyst Antoine Halff.

"The spike we see currently doesn't have too much staying power," Halff said.

All bets are off if tensions between the U.S. and Iran escalate, he adds.

But even a snapshot of today's prices compared with prices at the same time a year ago is psychologically alarming.

Crude oil prices hit a record overnight Thursday after the U.S. reported a surprisingly large drop in inventories. Light, sweet crude for December delivery fell $1.04 to settle at $93.49 a barrel on the New York Mercantile Exchange after rising as high as $96.24, a new trading high, overnight. That compares with $58.71 a barrel on the same day last year.

At $2.91 a gallon on average nationwide, gasoline prices are well above the year-ago average of $2.21 per gallon at this time, according to AAA and the Oil Price Information Service. Prices of the motor fuel usually fall sharply after Labor Day, but this year have risen about 8 cents per gallon since summer's end.

However, looking beyond the day's headlines is revealing and comforting — from an economic perspective. The average per-barrel price of crude on the New York Mercantile Exchange through Oct. 30 was $68.22, compared with $67.34 over the same period in 2006, according to Energy Department data.

The increase is slightly more pronounced at the pump. Regular gasoline has averaged $2.75 per gallon through the first ten months of the year, compared with an average of $2.67 a gallon over the same period last year.

Consumers are changing their behavior in response to higher prices at the pump. Sales of hybrid vehicles and energy-efficient compact cars are expected to set records this year, while sales of gas-guzzling pickup trucks and SUVs have declined.

Jason Shogren, a professor of economics at the University of Wyoming, said the U.S. economy has held steady when oil prices increased in recent years because the price changes were gradual. But even price spikes, like what has been seen in the crude oil market in recent weeks, isn't enough to convince Americans to cut back on their driving.

The average daily demand for gasoline is up slightly so far this year at 9.3 million barrels compared with 9.2 million barrels a day through October 2006, according to government data.

Consumers today have more discretionary income and the economy is less energy intensive than it was in the 1970s and 1980s, when oil price shocks easily triggered recessions, economists say.

Still, Fed policymakers cited soaring oil prices Wednesday when they decided to cut rates, signaling a conviction that what's as important as any price changes in a key commodity are perceptions about those price changes.

"People respond to pyschological barriers fairly significantly," Slocum said.

© 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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