Consumers cheer cheaper oil, but there are trade-offs
Consumers are clear winners when oil prices fall. Every $1 drop in the price of a barrel saves consumers about $2 billion a year, according to Commerce Department estimates, or about $9 for each citizen.
However, ''there are always winners and losers'' when energy prices change rapidly, notes Commerce Secretary Malcolm Baldridge. And the US government will face both good and bad news as a result of oil price cuts on which ministers of the Organization of Petroleum Exporting Countries are expected to vote this weekend.
On the negative side, lower oil prices for consumers will cut a variety of government revenue sources, thus boosting an already unwieldy federal budget deficit.
''The immediate effect of lower oil prices is to provide less revenue due to [reductions] in windfall profit and corporate tax receipts,'' says Everett Ehrlich, deputy assistant director of the Congressional Budget Office. The windfall profits tax is levied on certain types of oil, and it varies with the market price. The tax's constitutionality is currently being challenged in the Supreme Court.
While estimates vary, the Treasury Department calculates that in the near term Uncle Sam will lose about $700 million in revenue for each $1-a-barrel drop in oil prices.
Private economists say the revenue loss will be somewhat higher. If oil prices drop $5 per barrel, ''the net impact on the federal deficit is about $5.2 billon'' in the first year of the decline, says Mark French, an energy economist with Wharton Econometric Forecasting Associates.
These revenue loss estimates include the many positive effects of lower energy costs. Smaller oil bills will boost the nation's economic output, cut inflation, and speed some unemployed individuals back to work.
Given a $5-a-barrel reduction in oil prices, the US economy will grow about five-tenths of a percent faster than the 2.2 percent inflation-adjusted growth now expected, according to Robert Gough, senior vice-president of Data Resources Inc., a Lexington, Mass., forecasting firm.
And a drop in energy prices would also trim the overall inflation rate. Inflation as measured by the so-called GNP deflator would drop about 1.2 percent to 4.0 percent if the oil price drops $5 per barrel, Mr. French estimates.
Faster economic growth and lower inflation could cause a larger-than-expected reduction in the nation's unemployment rate, Commerce Secretary Baldridge told reporters over breakfast. ''We could see lower unemployment than our estimate because we could have a stronger recovery in the first year than we estimated,'' he says. In its budget, the administration said it expected unemployment to average 10.7 percent in 1983.
''The net effect of lowering a major cost like energy is certainly good'' for the economy, Mr. Baldridge argues. Private economists agree. And if oil prices stay down, smaller windfall-profit tax collections eventually will be offset by increases in other tax revenues caused by faster GNP growth.
By the end of fiscal year 1984 (Sept. 30, 1984) the revenue gains may outweigh the losses, Mr. Ehrlich says.
To date, oil price cuts have not triggered any major efforts to change energy policy either by Congress or the administration. The situation ''is so unpredictable that you cannot say you will have long-term, low-cost energy,'' says an aide to Sen. James A. McClure (R) of Idaho, chairman of the Senate Committee on Energy and Natural Resources. ''A lot depends on what happens with OPEC pricing. It is premature to take any actions.''
The House Energy and Commerce Committee also has not reacted to oil price changes with any major legislation, according to a spokesman for committee chairman John D. Dingell (D) of Michigan.
However, a department spokeswoman says Energy Secretary Donald T. Hodel has expressed concern that sharply lower energy prices may lessen consumers' energy conservation efforts.
And if US consumption goes up, the oil likely would be imported. That is because lower world prices would discourage domestic exploration. ''Some non-OPEC production made possible by high prices will become uneconomical,'' to go after, says George Friesen, an energy economist with Chase Econometrics, a forecasting firm. ''So non-OPEC supplies will grow much more slowly in the future.''
''While we get an economic growth benefit (from lower oil prices), we trade more vulnerability (to OPEC) to get it,'' CBO economist Ehrlich says.
If oil prices dropped significantly, new taxes on imported energy might be necessary to offset the trend, Mr. Baldridge says. If US reliance on imported oil began to rise sharply, ''we would have to look carefully at the whole taxing area so we don't become overly dependent.'' But he cautioned that currently he was ''not suggesting that the US government is going to boost oil taxes.''
The commerce secretary also noted that individual states might raise energy taxes to make up for revenues lost as energy prices fall.
Energy forecasters caution that if oil prices drop to the $25-a-barrel level, they would not stay there for long. ''Oil is a depletable resource and the price will go back to the cost of finding the replacement barrel. The replacement barrel is expensive,'' says Stephen A. Smith, vice-president of energy services for Data Resources.
With oil prices likely to rise again, this could be a good time to add to the nation's energy fuel supply. ''Right after a price slide would be a good time to buy,'' Mr. French says.
But an Energy Department spokesman says that given budget pressures and abundant oil supplies, the US can cut the fill rate of its strategic petroleum reserve from the congressional target of 300,000 barrels a day down to 220,000 barrels a day.