STORY OF THE WEEK: The impact of higher oil prices on the still-fragile US and global recovery could be considerable, writes Conor O'Clery, International Business Editor on Wall Street

Americans have never let go of their love affair with big cars. The gas-guzzling Chevrolets and Mustangs of the past have given way to the SUV, the big expensive sports utility vehicles that are popular with townies and rural dwellers alike.

When petrol is relatively cheap, and it fell to the magical figure of $1 (€1.14) a gallon in January, the impact on the household budget of filling an SUV tank is not that great. But with prices at the pump going up, as they have done steadily since the Middle East crisis escapated last month, rising 23 cents a gallon in the past three weeks, SUV and other automobile owners find themselves with less spare cash for other things.

Businesses in the US, whose spending is still at cyclical lows, also have to devote more resources to keep their trucks on the road; airlines will almost certainly feel obliged to increase fares, and households will pay more for oil-produced energy costs.

As US consumers drive two-thirds of the US economy (and they carried it through the recent slowdown), and rising energy costs tend to undermine consumer and investor confidence and spark inflation and higher interest rates, the impact of higher oil prices on the still-fragile US and global recovery could be considerable, especially if prolonged.

How bad is it? The price of crude oil shot up by $7 to almost $27 a barrel this week, its highest level since just after the September 11th attacks, (following which prices slumped back to $20 as the economy stalled).

Analysts fear serious consequences if oil production is cut back due to a widening Middle East conflict or US-led military action against Iraq.

There are, however, no signs of panic yet that the US might be facing another 1970s-type oil crisis.

The steep rise in oil prices this week was mostly speculative, analysts say, and followed Iraqi leader Saddam Hussein's call to Arab nations to use oil shipments as a weapon against the United States. But only Iran has shown any interest in pursuing an oil embargo alongside Iraq, which exports about two million barrels a day into the world market of 75 million barrels.

Other OPEC nations - Saudi Arabia, United Arab Emirates, Kuwait, Qatar, Algeria, Nigeria, Venezuala, Libya and Indonesia - have shown no stomach for joining in.

Even with the price rises in the past few weeks, oil is still much cheaper than in 1973/1974, when it rose to $60 to $70 a barrel adjusted for inflation because of the arab oil embargo against nations supporting Israel, which badly damaged the US economy.

Oil prices have also tended to surge upwards every spring and early summer in the past few years as big companies clear out their winter grade oil and replace it with summer grade.

Indeed, the price of petrol at the pumps along US highways has to climb much higher to come even close to the levels of last summer.

The US is also more flexible on energy than during the oil crisis of the 1970s when oil prices, inflation and interest rates all soared.

The energy component of the consumer price index is down to 6 per cent of the total, much less than 30 years ago, and energy use has been growing at only half the rate of the economy, said Mr Ron Planting, an economist at the American Petroleum Institute in Washington.

Growth in gasoline demand has been 1 to 1.5 per cent a year, rising to 3 per cent in the boom year of 1999 and dropping to zero in 2000, he said.

The US also has plenty of oil in reserve. Fresh data from the American Petroleum Institute on Wednesday confirmed an unexpected build-up in US inventories and helped pull world prices back. Crude oil inventory levels are up 13 per cent from a year ago, which means there is plenty of oil still available, according to Mr Douglas MacIntyre of the US Energy Department's Energy Information Administration.

"OPEC producers have been trying to cut back for the past several years and that suggests there is some extra capacity available if they chose to use it," said Mr Planting.

"Historically there have been times when the official OPEC line is to reduce production but somehow they will find a way to sell some more when the price is higher or the market demands it."

The US imports close to 60 per cent of its crude oil needs, 24 per cent of that from the Persian Gulf. Most of the remainder is sourced from Canada, Mexico and Venezuala.

Self-sufficiency is not a prospect for the US said Mr Planting, "and when you can't be self-sufficient, the alternative is to diversify your supplies and not be too dependant on any one part of the world," he said .

Domestic supply has increased because of deep water drilling in the Gulf of Mexico and the application of new exploration techniques and technology in Alaska.

Any rise in oil prices could eventually settle down after other exporters such as Russia and Venezuala make up the slack, according to energy consultant Ms Patti Harper-Slaboszewitz in BusinessWeek.

US President George Bush has seized on the oil scare to push the administration's controversial energy plan now before Congress, which includes increased drilling in Alaskan nature reserves.

His spokesman, Mr Ari Fleishman, said on Wednesday, that "the President's view is that this is a wake-up call to the US Senate about the need to reduce the reliance on foreign sources."

The markets, meanwhile, are reacting very cautiously to the new risks to the US economy.

In early March, before the Middle East crisis blew up, the Dow Jones industrial index surged more than 400 points in two days - the biggest such two-day leap since December 2000, on optimism about a rebound in the economy.

Despite a steady stream of improving economic data, however, including a rise in consumer spending and a recovery in the recession-hit manufacturing sectory, the stock markets stalled in March as the Middle East violence increased. The Dow Jones fell sharply every session in recent days as the conflict worsened and Israel's military actions on the West Bank left investors worried about where it might lead. The President's view is that this is a wake-up call to the US Senate about the need to reduce the reliance on foreign sources'