Cheap oil best gift U.S. consumers could get

December 06, 2008|By Jay Hancock | Jay Hancock,Jay.Hancock@baltsun.com

We're all waiting for President-elect Barack Obama's economic stimulus plan. But it doesn't look like it'll be passed until after he takes office in late January. Then it'll take months to implement.

Meanwhile, a massive can of economic Red Bull is already pouring down the country's throat, courtesy of President Hugo Chavez of Venezuela, King Abdullah of Saudi Arabia and other oil merchants.

Commentators were frantic six months ago about the economic and personal damage of oil at $140 per barrel. It's understandable now if they aren't cheering about the 70-percent-off sale on oil. Lower energy prices are largely a side effect of a recession that is throwing millions out of work around the world.

But cheap oil is the best present we could ask for that doesn't come from Washington. Taxpayers don't have to pay for it. It won't increase the national debt. It'll weaken Iran, Russia and other places that do not love us.

As the headlines become dark, inexpensive energy is a major bright spot and impressive demonstration of how free economies correct themselves.

Yesterday, oil plunged again, closing near $41 a barrel, less than a third the price of last summer. That's the biggest, fastest decline ever.

I filled my tank for $23 last week. Today's prices mean an extra $2,400 a year in the wallet of my two-car family. Tax-free.

Gas will probably get even cheaper. The pump price doesn't reflect the most recent decline in crude. This week, Merrill Lynch predicted crude could fall as low as $25 next year.

Washington gadflies are talking about a "massive" Obama stimulus package - as big as $300 billion or maybe even $500 billion. It'll get spent on roads, bridges, tax credits, tax cuts and so forth.

Well, the difference between $140 oil and $40 oil represents an annual stimulus to the U.S. economy of $700 billion. How's that for massive? And it's not a one-time deal, as long as energy prices stay low.

This will be the worst recession since the early 1980s, analysts say. That's probably right.

But both recessions in the 1980s were so painful, in part, because of high energy prices. In today's dollars, oil then was $80 a barrel. That caused bad inflation and accompanying killer interest rates that persisted through both downturns.

This recession, for all its alarming aspects, doesn't come with those challenges. Expensive oil certainly helped pitch us into this slump, but crude's quick, steep descent will keep the agony from being as bad as it might have been. In the 1980s, oil didn't decline until long after the economy had begun to grow again.

Cheaper oil should lead to lower food prices. Electricity prices should also fall eventually. All this will mean lower inflation.

What would you rather have? High unemployment and high inflation, as we did in the 1980s? People added them to get the "misery index."

Or a recession that at least comes with consumer price relief?

This is not to minimize the present misery. Economists will tell you that this recession, with its virtual evaporation of lending at almost any interest rate, is in many ways more troubling than what happened in the 1980s.

But falling oil prices have been overplayed as bad news and underplayed as a force that will help get us out of this.

To end-of-the-worlders, cheaper energy heralds deflation - the kind of persistent and widespread price decline that helped make the Great Depression so poisonous. But the gold-backed monetary system that caused 1930s deflation is ancient history.

Or maybe $40 oil is the latest chapter in Big Oil's and OPEC's plot to rule the universe. Now that they've booked huge, record profits for a couple years, the thinking goes, oil barons are conspiring to cut prices so we don't develop alternative energy sources and end our petrol addiction.

But if this crisis has taught us anything, it's that nobody is that clever. No industry thinks further ahead than the next couple of quarters and next year's bonus. Not the mortgage business. Not the energy business.

Plunging crude prices are about supply, demand and not much else.

True, the effect may be the same. Cheap energy could again prompt us to fire up gas-guzzlers and scrap investment in solar and wind power. After the economy recovers, Obama must apply a federal gas tax or national limits on carbon emissions to make sure that doesn't happen.

But for now, cheap oil is a blessing, although not a panacea.

In June, Bloomberg News quoted a Russian tycoon predicting oil would hit $250 a barrel and interviewed a bunch of analysts about what that might mean.

"A disaster for all the oil-importing countries," said one. Food prices would "almost double," said another. "A massive shutdown of companies," said a third.

Let's not discount the present challenges. But let's also be thankful that crippling energy costs and everything that goes with them are one particular disaster we don't have to worry about.

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