Rising oil prices could stall states' recoveries

Gasoline prices are seen posted at a petrol station in Hollywood, California, February 26, 2011.

WASHINGTON (Reuters) - Rising oil prices could trample prospects for economic recovery in many states, three governors warned on Sunday, as a leading economist said they also threaten the country's economic comeback.

"Oil prices -- I hope don't go any higher," said Indiana Governor Mitch Daniels, a possible contender for the Republican presidential nomination in 2012. "But everywhere now one hears there's more than a minor risk they're going to go a lot higher."

A spike could freeze business investment and consumer spending, he said during a meeting of the National Governors Association.

Political disruptions in oil-producer Libya helped push crude prices briefly past $100 a barrel last week. Retail gasoline prices, meanwhile, hit a national average of $3.19 a gallon, the highest pump price in nearly 2 1/2 years.

Leaders in the United States and elsewhere have sprung into action, with members of Congress asking President Barack Obama to tap emergency reserves and Saudi Arabia saying it is willing to plug gaps in supply.

"They're a threat to the world, not just America," North Carolina Governor Beverly Perdue, a Democrat, said about the prices.

"It's like an algebra formula where you're trying to figure out the answer to the problem but you don't know the unknown and the unknown is the cost of oil," she said, calling oil "the elephant in the room" for states.

While the national recession officially ended in 2009, states' budgets have been slow to recover from an historic collapse in revenues that caused their governments to slash spending, hike taxes, borrow and turn to the federal government for help.

Many states, including North Carolina, are seeing an uptick in revenues but governors are nervous about even the smallest possible disruptions to the inflow of money, especially as they confront budget gaps currently totaling $175 billion.

"There is nothing more threatening to our economic prospects than higher oil prices," Moody's Analytics chief economist Mark Zandi told the governors, calling it "our number one problem today."

Zandi said the national economy can probably withstand oil remaining at $100 per barrel or below but "if we go above that, I think there is reason to be nervous."

Gas price increases can hurt many areas of Arizona life, according to Governor Jan Brewer, a Republican who said prices will likely go higher.

"We count on a lot of tourism -- people driving their kids in their SUVs and their families to Arizona to see our beautiful state," she told Reuters. "And we're spread out. A lot of people in Arizona don't jump on a subway. They jump in their cars and they get on those freeways."

"People are going to have less money to spend on other things," she said.

(Additional reporting by Tom Doggett; Editing by Bill Trott)