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Not long ago, all but the most fanatical bears on Wall Street scoffed at the idea of a double-dip recession. But after a recent surge in oil prices, no one is laughing any more.

Over the last three months, crude oil has risen 44% to its highest level in more than two years amid concern about a war with Iraq, and as a strike in Venezuela reduced supplies from the world's fifth-biggest exporter. Meanwhile, retail gasoline has jumped to $1.60 a gallon -- the highest level since June 2001.

Because energy costs essentially act as a tax on consumers, economists worry that this recent increase could force consumers to tighten their purse strings. That could be devastating to the economy because consumer spending accounts for two-thirds of gross domestic product.

"It seems pretty clear to us that we are experiencing an old-fashioned oil shock," said Merrill Lynch chief U.S. strategist Richard Bernstein. "Nothing destroys consumer purchasing power as effectively."

Bernstein said that every significant oil shock in the last 30 years has caused, or at least contributed to, a recession, and he believes the odds of the same thing happening this time round are "starting to increase significantly."

Already, higher energy prices have had a significant effect on real wage growth, and hence, spending. Although real wages have been steadily increasing for almost 10 years, the rate of increase has slowed sharply since January 2002. Wages grew at a sluggish 0.5% in December, according to Bernstein, and economists say the weakness continued into 2003. In fact, the month-to-month increase in average hourly earnings grew in January at the slowest pace in 10 years.

Real wages are defined as average hourly earnings minus inflation. If inflation goes up because workers have to pay more for energy, then their salaries are effectively being reduced. And lower wages usually lead to lower spending. On Thursday, the Commerce Department said retail sales fell more than expected in January, although sales excluding autos were up a respectable 1.3%.

"I never thought I'd consider jumping into the double-dip camp," said Richard Yamarone, an economist at Argus Research. "But if these $35 or $40 oil prices are sustained, I would not be surprised at all to see a return to recession."

Just what is the likelihood of oil prices staying put, or potentially moving higher?

Fadel Gheit, an energy analyst at Fahnestock, said everything hinges on the timing and severity of a war with Iraq. He believes that energy prices will likely remain where they are until the conflict begins, and said prices could spike further if there is any disruption to the oil supply. That could happen, for example, if Saddam Hussein destroys oil fields as he did during the Gulf War.

Still, Gheit believes that President Bush will release oil from the Strategic Petroleum Reserve in the event of war to "send a clear message to the market that there's no need to worry." Gheit also noted that demand for oil is likely to moderate as spring approaches, and said prices could come down as a result. The International Energy Agency said, however, that it expects oil demand to rise more than expected this year, returning to growth rates of the 1990s, because of unusually cold weather and increased demand in China.

As for the situation in Venezuela, Gheit said OPEC already has started to increase production to make up for the shortfall. But other analysts worry that the crisis could drag on, and they say a second economic contraction is a distinct possibility.

"Heating oil is up 100% from a year ago, retail gasoline prices are up 45% from last year and U.S. diesel prices jumped 12 cents a gallon last week -- which is an all time

weekly record, so, yes, it could push us back into a double-dip recession," said Phil Flynn, energy analyst at Alaron Trading.

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Flynn said this outcome could be averted if the U.S. were to go to war soon because, like Gheit, he believes that the government would release "a whole bunch of oil from the SPR, which would bring prices down."

Ethan Harris, senior economist at Lehman Brothers, is skeptical that the $10 increase in oil prices over the last three months would be enough to send GDP growth into negative territory. Typically, he said, a $10 increase in oil translates into a 0.5% reduction in economic growth. Still, Harris does believe that the market is "one bad news

event away from a double-dip."

"Clearly the economy is pretty fragile," he said. "And if you have a bigger-than-normal response to the rise in oil prices like we saw in the last Gulf War, when there was a big move

down in consumer confidence, then you could get a bigger effect. But we haven't seen evidence of that yet."

Nymex crude oil rose another 49 cents to $36.26 a barrel Thursday -- a two-year high. Inventories fell last week to the lowest level since 1975.

Meanwhile, despite oil's climb, shares of companies that produce and refine it have been in the doldrums recently, in many cases trading just above their 52-week lows. More expensive oil usually makes such companies more profitable, but investors are worried about a repeat of 1991, when oil prices plummeted after the Gulf War was won. At $32.70,


(XOM) - Get Exxon Mobil Corporation Report

is $3 above its 52-week low.


(CVX) - Get Chevron Corporation Report

, at $63.08, and


, at $37.70, are both a couple dollars north of their 52-week nadirs.