The latest surge in energy prices may prove the undoing for a U.S. economy already pressured by a housing slowdown and accelerating inflation.

Some economists are even tossing around the 'R' word, saying a recession is possible if the unrest in the Middle East escalates and further gooses the price of oil.

Could geopolitical events suddenly turn a soft landing into a recession? Absolutely, the London-based Economic Outlook Group wrote in a research report on the U.S. economy.

This week has seen U.S. crude oil prices hit repeated records above $75 a barrel, on Friday touching $78.40 on an eroding geopolitical landscape.

The conflict between Israel and Hamas and Hizbollah guerrillas only added to tensions that included Iran's nuclear standoff with the West, fears over Nigeria's oil supply after militant attacks, heavy fund buying and falling U.S. crude supplies.

Oil prices have doubled since 2004 and oil futures contracts promise little relief ahead, soaring above $80.

While today's prices are lofty, many economists point out they are still a far cry from the inflation-adjusted $87.65 average of 1980 following the 1979 Iranian revolution.

Bush administration officials expressed hopes the economy would stay on an upward path despite the energy surge and its impact on inflation and spending.

We have found that the U.S. economy has been surprisingly resilient, surprisingly able to manage the increase in prices that we have already seen, U.S. Energy Secretary Samuel Bodman said at a news conference with Canadian government energy officials. I am hopeful that it will continue to do so.


Still, even before this latest run-up, the economy had started to suffer the effects of costlier gasoline, which hits spending power just as tapped-out consumers are losing the benefit of cheap credit and easy home equity extraction.

According to U.S. Commerce Department data released on Friday, June retail sales fell 0.1 percent, the first decline since February. The result confounded Wall Street, which had looked for a 0.4 percent gain.

Meanwhile, the University of Michigan's first reading on consumer sentiment in July fell to 83.0 from June's final 84.9 reading, said sources who saw the subscription-only report. Economists had expected a reading of 85.5.

Joel Naroff, president and chief economist of Naroff Economic Advisors in Washington, said the economy will suffer acutely from the energy surge, although he doesn't yet see a bona fide contraction emerging.

However, he said energy prices come at a difficult time with consumer savings running on empty, interest rates rising and businesses contending with rising wages and pricey energy.

We're moving toward that perfect storm, especially with this latest rise in energy, Naroff said.

I don't think it's yet a recipe for recession, though I will say $100 a barrel, $4 a gallon of gasoline - there's only so much you can cut, he said.

Demand for gasoline remains strong despite pump prices averaging nearly $3 a gallon nationally, indicating U.S. consumers are either unwilling or unable to change their driving habits. But that means consumers have less to spend away from the gas station.

Naroff said the dual threat of higher prices and slower growth poses a dilemma for the Federal Reserve, which has raised interest rates 17 straight times to curb inflation.

He believes officials will first attack inflation and then reverse course and cut rates as rapidly and as strongly as they possibly can to address the threat to growth.

I have the possibility of a cut as early as December. But more than likely January, Naroff said.

Some economists are more optimistic.

In a research note, Global Insight chief economist Nariman Behravesh wrote that while he expected consumer spending growth to slow to 2 percent this quarter from 5.1 percent in the first, it should rebound to 2.8 percent in the second half.

However, with oil prices hitting record highs and rates expected to rise at least a little more, the risks for consumer confidence and spending are on the downside, he added.

(Additional reporting by Chris Baltimore and Alister Bull in Washington and Lucia Mutikani in New York)