U-T Special Report Ripple effect: Rising gas prices reshape our lives As $7 a gallon gas looms, big changes are in store for family finances, regional lifestyles and the national economy. The San Diego Union-Tribune introduces a four-day series on the impact of rising oil prices.
Part 1: Gas costs squeeze middle-class families in San Diego County trying to make ends meet.	Part 2: The price of gas is changing commuters' attitudes on what they drive and even where they live.
Part 3: Soaring fuel costs take huge bite out of grocery, farm budgets.	Part 4: We may be heading back to 1970s-style “stagflation,”.

Business was stagnating, factories were closing and unemployment rolls were burgeoning, yet prices were skyrocketing.

And a major reason for the economic turmoil was the dramatic rise in the price of gasoline, which in March 1981 soared to a then-record $1.42 per gallon, the equivalent of $3.38 in today's dollars.

Now that gasoline prices once again have moved into the stratosphere, economists warn that we may be heading back to the future: a 1970s-style future.

“What we're going to get is a combination of extremely high inflation and severe recessions,” said Stephen Leeb, head of Leeb Capital Management in New York. “It will be very much like the 1970s, except on steroids.”

For consumers, it could mean less money to spend and an eroded standard of living. Businesses, facing a dismal environment for sales, could be forced to lay off workers and cut costs.

Graphic: Foreign oil and the GDP

For the U.S. economy, high oil prices could result in trillions of dollars being transferred abroad. The center of the economic world could shift away from the United States toward oil-producing nations – at least as long as they can keep producing a steady stream of petroleum.

Robert Hirsch, chief energy analyst for Management Information Services in Washington, D.C., estimates that as oil continues to rise over the next couple of years, the cost could exceed the inflation-adjusted $4 trillion total price tag of all previous oil disruptions since 1974.

1979 file photo / United Press International Drivers lined up at a Los Angeles gas station on the first day of odd-even gas rationing in response to fuel shortages after Iran's revolution.

During the 1970s, oil-price spikes helped push the U.S. economy into two of its worst postwar slowdowns: the 1974-75 recession, triggered in part by an OPEC oil embargo in the wake of the Yom Kippur War, and the 1980-81 recession, sparked by an oil disruption after Ayatollah Ruhollah Khomeini's revolution in Iran. Both recessions were marked by high inflation rates that gave birth to the term “stagflation,” referring to inflation during a time of economic stagnancy.

Today, oil threatens to bring stagflation back to life. With fuel prices surging, the official U.S. inflation rate hovers around 4 percent. Some market analysts say inflation could top 6 percent by the end of the year.

“The outlook for the rest of 2008 and early 2009 is darkening, not least because of the seemingly relentless rise in commodity prices,” said Nigel Gault, chief economist at the Global Insight research firm. “We now expect oil, food and raw-materials costs to keep rising through the middle of 2009.”

Although Gault's prediction of a 6 percent inflation rate sounds low compared with early 1980, when inflation peaked above 14 percent, keep in mind that in the early 1970s, a rate of just 4 percent seemed so intolerably high that President Nixon imposed wage and price controls. Once Nixon relaxed those controls, pent-up demand and an OPEC embargo pushed inflation through the roof.

Moreover, some economists say that if the government counted inflation the way it did in the 1970s and 1980s – before government economists changed their calculations for measuring price increases – it already would be as high as 7 percent to 10 percent.

If gasoline rises to $7 per gallon, it could push the official inflation rate into the double digits, through price increases on food and a wide variety of other goods as well as fuel.

For now, inflation is largely contained within food and energy prices. But the cost of fuel also will drive up business costs, especially if workers start pressing for higher salaries to make up for the money they are spending at supermarkets and gas stations.

That could create the type of 1970s inflationary snowball that prompted Federal Reserve Chairman Paul Volcker to start jacking up interest rates, pushing the federal funds rate to a high of 20 percent in June 1981. Volcker quashed inflation, but he also threw the economy into a deep recession.

Another resemblance to the oil crises of the 1970s and 1980s is the amount of money that Americans are sending overseas in exchange for oil.

As of the first quarter of this year, Americans were spending the equivalent of 3 percent of the gross national product on foreign imports of oil, compared with less than 1 percent in 2002. The only other time spending on foreign oil has passed the 3 percent mark was during the oil crisis of 1980-81.

“This is a massive transfer of income from U.S. citizens to both domestic and foreign producers,” said economist Edward Leamer, director of the Anderson Forecast at the University of California Los Angeles. “Imported petroleum now accounts for over 60 percent of our current trade (deficit) of $700 billion.”

On Capitol Hill, politicians are beginning to broach the question of whether the United States should be transferring such wealth overseas.

“Every time we send $1 overseas, it is a dollar that can't be invested here in more jobs and more economic activity,” said Sen. Judd Gregg, R-N.H. “That huge amount of dollars, over $300 billion a year, is money that we need here in America to make ourselves stronger.”

The effect of this transfer of wealth can be seen in a place like Dubai or Abu Dhabi, oil-rich emirates on the Persian Gulf that are using their money to create forests of skyscrapers. Economists note that the more money goes abroad, the less is available to put into civic improvements, business development or fixing the deteriorating infrastructure.

“It's like a tax on Americans, but it's worse than a tax because it's simply flowing outside the United States to the oil producers,” Leamer said.

Severin Borenstein, director of the Energy Institute at the University of California Berkeley, said it's possible that the current oil-price increases could drive the economy into a prolonged recession, forcing more conservation among drivers. But Borenstein said he doubts that the decline in demand would have a lasting effect on prices.

“A recession in the U.S. will definitely dampen demand here, and a worldwide recession would slow demand from China and India,” Borenstein said. “But it will probably only slow it. Demand in Asia will continue to rise, and that will continue to push prices higher.”

Ryan Ratcliff, an economist with UCLA's Anderson Forecast, sees a bright side to the rising oil prices.

“People are very slow to change their behavior,” Ratcliff said. “If they perceive that this is just a temporary spike in gas prices, they won't change. They'll just grumble.

“But if it's sustained, that's when people start redoing their calculations about taking trains versus buying cars. That's when you get a lot bigger push for mass transportation in car-happy California.”

Already, Americans are cutting back on their consumption. There was a 2 percent decline in gasoline usage between May 2007 and May 2008.

History shows that rising oil prices force Americans to conserve. After the two oil disruptions in 1973-74 and 1979, Americans cut their consumption by 13 percent.

The huge, boat-size sedans of the late 1960s and early 1970s gave way to compact, fuel-efficient cars, including an influx of imports from Japan – a pattern that is being repeated today. Utilities started seeking renewable energy systems and reducing their reliance on oil. Homes and offices shifted away from heating oil toward natural gas and electricity.

Once the oil price peaked and began to come down, Americans continued to conserve oil in most areas, except for driving. Between 1973 and 2003, total vehicle miles traveled for cars and light trucks more than doubled – even though most other forms of oil usage remained relatively flat or declined slightly.

Charles Langley, an energy analyst at San Diego's Utility Consumers' Action Network, said he doesn't envision “a 'Road Warrior' type of economy in the very near future” – a reference to the 1981 Mel Gibson film set in a post-apocalyptic world in which car-bound survivors fight bloody battles over the remaining supplies of gasoline.

“We're going to be stuck with oil for a very long time,” Langley said. “The best we can do is use it more efficiently and effectively.”

 Dean Calbreath: (619) 293-1891; dean.calbreath@uniontrib.com