Bay Area could see $5 a gallon gas by summer

SAN JOSE, Calif.

A USC business school report estimates that for every penny increase in a gallon of gas, as much as a billion dollars is pulled from our economy. So another $1 increase in gas could sap $100 billion in other spending.

AAA says the price of a gallon of regular unleaded is 20 cents higher. Gas prices hit $4 last year, but the rise this time has been rapid and unusual for February.

Higher pump prices put a squeeze on the budget, and there's already an indication consumers are thinking about ways to cut back on spending.

"If you spend more money on gas, you're not going to spend more money buying some other goods," Belmont resident Alex Kholodenko said.

That could impact the economic recovery.

The benchmark oil price, known as West Texas Intermediate, hit $105 per barrel Monday. One year ago, it was $89, an increase of $16 a barrel. The Department of Energy says a $20 increase leads to a four-tenths of a percent drop in the gross domestic product and a one-tenth of a percent increase in unemployment.

Terry Connelly, Dean Emeritus of Golden Gate University's business school, says reduced consumer spending creates a domino effect.

"So what happens to the stocks of Walmart, Target and so forth," he said. "We've had a nice run-up in the stock market. Then you start seeing stock analysts start downgrading these stocks. They're not going to be making as much money in this quarter because of higher gas prices. That affects people's 401Ks, so you get a feedback loop."

Analysts are predicting gas prices could hit $5 a gallon as a result of escalating tension with Iran over its nuclear program. Iran already has blocked oil shipments to Great Britain and France.

A significant chunk of what we pay for gas is taxes. The federal government tacks on 18.5 cents per gallon and states and counties add more. California has the highest average gas tax at more than 64 cents per gallon, including the federal tax. New York is close behind. Oil rich Alaska has the lowest gasoline tax.

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