Oil price drop makes for some losers as well as winners

McClatchy NewspapersDecember 19, 2008 

WASHINGTON — Plummeting oil prices may be one of the few bright spots for U.S. consumers this winter, but not everyone is happy.

Lower oil prices mean declining revenue for oil companies and oil revenue-dependent governments, and they've suffered as oil prices have dropped by 75 percent since July.

Worries also have spread among those developing alternative energy sources, who fear that public support and financing for energy innovations will wane as oil prices tumble.

U.S. consumers haven't reaped all the benefits, either, as food prices stay near the levels they hit when rising energy prices drove up the cost of bread, cereals and other goods.

As the winners and losers of the changing energy picture shake out, what's certain is that oil prices will remain low for months to come, said Robert Johnston, the director of energy and natural resources at the Eurasia Group, a U.S.-based risk assessment firm. The global recession surely will deepen, unemployment will grow and people will drive less, he said.

The oil-price drop continued Friday, with prices falling below $36 a barrel — their lowest in more than four years — from their high of $147 in July. Prices fell even as the Organization of Petroleum Exporting Countries pledged this week to cut oil production by a record 2.46 million barrels a day to stop the decline.

"Realistically, we won't get back to the $80-a-barrel range until 2010," Johnston said. "With unemployment rising, people are making fewer trips to work, and demand is down."

Overall, the United States — the world's biggest net oil importer — comes out ahead with the fall in oil prices. The drop comes at an opportune time for millions of households in areas that rack up high heating bills.

U.S. energy companies also are better positioned than many of their foreign competitors are to weather the price drop, having operated more conservatively during good times and largely resisted the temptation to spend record profits, said Kirk Sherr, the chief executive officer of Arrakis Geodynamics Ltd., an oil-services provider focused on the Middle East.

"U.S. companies have seen this before, and while folks will be surprised and challenged, most folks will do fine," Sherr said.

The same can't be said, however, for the leaders of Venezuela, Russia and other oil-producing countries that spent much of their record revenue on domestic social programs and foreign prestige projects.

This week, Venezuelan Finance Minister Ali Rodriguez admitted that his country will have to scale back some of President Hugo Chavez's generous social programs, but not before a referendum in February on whether to abolish presidential term limits.

With oil accounting for 80 percent of Venezuela's export revenue, the Chavez government had budgeted this year with an expectation that crude oil prices would average $60 a barrel. Those plans are in trouble now.

"Governments are going to be severely tested in trying to address all these factors," Sherr said. "There's going to be a lot of pressure on commodity-exporting countries and on their currencies and reserves."

U.S. states that depend on oil revenue, such as Louisiana and Texas, also are suffering, as are drilling, trucking and oil exploration firms, which had seen business boom when prices were high.

Foreign and domestic oil companies are abandoning exploration projects that had been profitable at $140 a barrel but aren't worth continuing at $35 a barrel.

Johnston said that a recession-fueled fall in demand explains much of the price drop. According to the U.S. Department of Transportation, Americans drove 100 billion fewer miles from November 2007 to October 2008 than they did during the same period a year before.

The financial crisis also has fueled the price declines, as hedge funds and other investors that had poured money into energy markets pull out with the collapse of financial markets, Johnston said.

For U.S. households, however, falling energy prices won't make or break budgets. Vehicle gasoline expenditures, for example, make up less than 4 percent of household costs, according to the U.S. consulting firm Cambridge Energy Research Associates.

Nonetheless, environmentalists and clean energy advocates hope that consumers will remember this summer's price shocks and back more alternative energy research. They argue that the environmental costs of burning fossil fuels outweigh the impact of a drop in oil prices.

Many are looking to President-elect Barack Obama to fulfill pledges to fund clean energy research regardless of whether oil prices rise or fall, said Mike Burnett, the executive director of the Climate Trust, a nonprofit group in Portland, Ore., that funds carbon emission-reducing projects.

"If we look at only the purely short-term economics, (the price drop) clearly makes weaker the case to do energy efficiency and renovation," Burnett said.

"But if we only look no farther than the end of our noses, we'll find ourselves in the exact same situation. China and India are still growing and need more resources. In the long term, energy prices won't stay this low."

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McClatchy Newspapers 2008

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