Despite oil's climb, U.S. economy bends, but doesn't break

Further, numerous studies and analyses have empirically explained why the U.S. economy has slowed -- but not fallen into a recession (at least not yet) -- with the march of oil past $80 per barrel. (Oil closed Monday up 60 cents to $89.31). Previous oil shocks, in 1973-74 and 1979, preceded U.S. economic recessions.

Economists have (correctly, in the view of many) cited the nation's improved energy efficiency, oil's lower percentage of gross domestic product, and the typical American household's increased purchasing power as reasons why, despite continually high oil prices in 2007, the U.S. economy has managed to chug along, albeit at a slower pace.

Still, Wall Street may be overlooking a theory, one that may contain insights that both help explain the anomaly and that illuminate.

The Leeb Thesis

Author Steve Leeb, senior editor of The Complete Investor newsletter (subscription required), argues that the reason the U.S. economy has not fallen into a recession this time is that the current oil price run-up has been gradual, relatively speaking. During the 1973-74 oil shock, oil's price quadrupled in less than 9 months. During the 1979 oil shock, it rose 265% in a year.

In comparison, during oil's rise this decade, oil has risen 45% in 2007, and about 107% since January 2005. To be sure, those are not insignificant increases, but they are not sudden increases.

In other words, during this run-up, we haven't seen the sudden, large increase in the price of oil that characterized the 1973-74 and 1979 oil shocks (and that's the reason why, quite aptly, those events are called "shocks").

Leeb argues that this is the main reason the U.S. economy today has been able to keep growing (but the economy has slowed with oil's continued rise in 2007).

Oil Analysis: Leeb offers considerable evidence to support his thesis, and it behooves economists and Wall Street analysts to incorporate his assumptions/projections into their models, at least as part of a research guide outlining various theories regarding oil impact scenarios. Further, in addition to economic impact studies, more research is needed as to why another oil shock hasn't occurred (at least not yet).