Oil prices dipped below $70 this week before an OPEC threat to cut production sent them back up above that mark on Friday. Falling oil prices are very good news for Americans, as long as they don't drop too far. For some countries, it appears, they already have. Britain's Prime Minister Gordon Brown called the proposed OPEC oil production cut "scandalous" for good reason.
Recent lower oil prices are a big boon to consumers, especially American consumers, and could soften the coming recession to the benefit of the world economy.
Figures from the Energy Department demonstrate the economic benefit vividly. Compared to 2006 and 2007, when a barrel of oil cost between $65 and $75, the average price for 2008 is nearly $112 a barrel, having surged to over $140 a barrel during the course of the year. The sharp spike in oil and gasoline prices caused a drop in imports from more than 12 million barrels a day to just over 11 million. Even so, Americans will pay about $150 billion more for imported oil this year than they did in 2006.
But recent oil prices, if sustained, mean Americans' will get about that much back next year, even if they use another million barrels a day at the lower price. The Congressional Budget Office estimates that total individual income tax collections for next year will be $1.3 trillion. So spending $150 billion less for oil next year would be equivalent to a tax cut of more than 10 percent for American consumers. That is money that could be spent on other goods or saved.
The news is not so good for countries that have tied their fortunes to higher oil prices. A senior official of the International Monetary Fund, Moshin Khan, recently told the Dow Jones news service that Iran's "break-even" price — the price at which the government can balance its budget — is $90 a barrel. Below that, "they would have to tighten their public expenditure policy, and probably cut subsidies ... the public would not be content."
His analysis suggests an oil price below $90 might make Iran more amenable to ending its nuclear weapons program in exchange for economic benefits. Falling oil prices will also limit the ambitions of Venezuela, where the break-even price is reported by The Wall Street Journal to be $80 a barrel. Russia also is heavily dependent on revenue from oil exports, which make up about a third of its budget.
And if the oil price continues to fall, there will come a point in the United States when government and private investments in energy alternatives and more economical cars will be put at risk. "We may hate high fuel prices, but they've been driving us in the right direction when it comes to fuel economy," General Motors Vice Chairman Bob Lutz recently told the Los Angeles Times.
Cheap oil is good short-term news for consumers and the economy. But for strategic and environmental reasons, the United States should continue to pursue the course of reduced oil consumption and more alternative sources of power.
