As oil prices edge ever higher, more people are expressing concern about what this phenomenon is doing or could do to economic recovery. The conventional wisdom used to be that, in the U.S., whenever total national spending on oil products exceeded four percent of GDP the country went into recession. Elaborate charts have been produced showing how this happened in four of the recessions over the last 40 years. In 1974, 1981, 1991, and 2008 oil prices rose to levels anywhere from 4.5 to 9 percent of GDP just prior to the U.S. economy going into recession.

Only the recession caused by the dot.com bubble of 2001 did not involve unusually high oil prices. Three of the price spikes –1974, 1981, and 1991– came as the result of disruptions to the oil supply from the Middle East, while the 2008 spike is now thought to have been caused by the demand for oil getting ahead of available supply. Each of these price spikes and subsequent recessions was followed by a drop in U.S. demand for oil. During the 1974, 1991, and 2001 recessions, oil demand dropped by about a million barrels a day (b/d). The 2008 recession cut U.S. demand by roughly two million b/d and the recessions of the early 80’s cut demand by four million b/d.

So where do we stand in in the early spring of 2011? First, demand in the U.S. has bounced back about half way towards the 2007 high of over 21 million b/d from the winter of 2008-2009 low of about 18.5 million b/d. For the world as a whole however, consumption has recovered all the way back to a new high of 89 million b/d in February. This rebound has been so rapid that there again are concerns about demand outrunning supply. Prior to the outbreak of protests in the Middle East, the International Energy Agency (IEA) really had to stretch to come up with a scenario whereby steadily increasing demand from Asia and the oil producing states could be satisfied without a demand- and economy- killing price spike. The IEA’s current scenario has the Chinese slowing the rate of increase in their demand for oil to half what it was last year and for the Saudis to use some of their spare capacity to satisfy whatever growth there is in 2011 for oil.

This scenario just might have worked out except for the Middle East uprisings and the fact that thus far in 2011 Beijing does not appear to be reducing the rapid increase in its demand for imported oil as much as necessary. With virtual cessation of oil exports from Libya likely for some time, the supply/demand situation has once again become extremely tight. Now the Saudis, helped by a couple of the other Gulf producers, are said to have increased production by 600,000 – 800,000 b/d to compensate for the lost Libyan production. The trouble was that much of the spare production capacity being used to replace the lost Libyan oil was the same spare capacity that was supposed to keep oil prices from spiking later this year.

The Saudis may still have more spare capacity that can be brought into production whenever the markets demand it – at least this is what they keep telling us. The organizations that are supposed to keep track of such things – International Energy Agency and the U.S. Department of Energy are for now agreeing with this claim.

In recent days, however, we have been starting to see doubts being raised by the major financial newspapers and some large financial institutions as to whether this rosy scenario of a combination of increased OPEC production and slower Chinese growth really portrays the rest of 2011.

With U.S. consumers burning about 140 billion gallons of gasoline a year, a $1 per gallon increase in gasoline prices drains $140 billion that might otherwise go for discretionary spending. In addition, another $140 billion or so would be drained from indirect consumer spending through higher prices for almost everything that has an oil component in its price. This is starting to sound like real money.

Most commentators employed by the financial press or financial service firms now are telling us that it will now take $120 a barrel oil over an extended period to wreak real harm to our economy. They quickly add that while oil prices may touch this price they are unlikely to stay there long enough to hurt economic recovery. If you are looking for a real optimist, then you might like Professor Kenneth Rogoff of Harvard who told an oil industry conference recently that it will take $160-$180 a barrel oil to drag down the economic recovery.

So there you have it: some analysts think our economic problems started when oil surged past $86 a barrel a ways back while others say “no, it is twice that much.” In the meantime oil in London, which now is widely considered the real global benchmark price, has been hovering around $115 a barrel for the last two weeks, gasoline in California is now above $4 a gallon and consumer confidence is hitting recent lows. It’s looking like we will have an interesting summer.

Tom Whipple is a retired government analyst and has been following the peak oil issue for several years.