Issue of the week: The mixed blessing of lower oil prices

It’s the recession’s silver lining, said Gargi Chakrabarty in the Denver Rocky Mountain News. Gasoline prices have tumbled nearly $1 from last July’s all-time high of $4.11 a gallon; prices likely will slip below $3 a gallon in the coming weeks “and stay there for the rest of the year.” The sharp drop is a symptom of the slowing economic activity around the world. Demand for gasoline is falling almost 10 percent a week in the U.S., and even faster in other countries, including China, the developing world’s energy hog. The slowdown is showing up in prices for crude oil, which settled at $74.25 in New York trading this week, a nearly 50 percent drop from the July high of $147. The OPEC countries say they’ll reduce output to shore up prices, but that strategy might fail if the recession is a deep one. “If the U.S., Europe, and Japan go into a major recession,” says oil analyst Mark Pervan, “there’s no reason we can’t see $35, $40 a barrel.”

U.S. consumers, though, can take only so much consolation from the price drop, said the Associated Press. That’s because falling home and stock values have been so traumatic, any positive impact of lower gas prices has been blunted. “I’m more concerned about the financial condition of my 401(k),” said Ben Brockwell of the Oil Price Information Service, expressing a common sentiment. Such worries will likely keep a lid on demand, even as prices fall further.

That’s bad news for Hugo Chavez, Mahmoud Ahmadinejad, and Vladimir Putin, said Simon Romero in The New York Times. While oil prices were rising, “the leaders of Venezuela, Iran, and Russia muscled their way onto the world stage, using checkbook diplomacy and, on occasion, intimidation.” Now, though, “economists in Venezuela are expressing alarm over the government’s ability to pay its bills,” Iran is contemplating an 19 percent cut in its national budget, and Russia is rethinking plans to modernize its crumbling energy infrastructure. “The producers are experiencing a reverse oil shock,” says energy consultant Daniel Yergin.

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So are backers of alternative energy, said Steven Mufson in The Washington Post. The drop in prices “threatens a wide variety of game-changing plans to find alternatives to oil or ways to drastically reduce U.S. consumption.” General Motors is now having trouble raising funds to develop its Chevy Volt plug-in hybrid, and Tesla Motors has postponed the introduction of its electric sedan. Tight money is also hurting start-ups’ efforts to develop biofuels from algae, wood chips, and wild grasses. Because any payoffs from such ventures are well down the road, private financing is all but impossible to find. That leaves only government subsidies, which could be scarce without high oil prices to mobilize taxpayers and concentrate policymakers’ attention. Every silver lining, it seems, comes with its own cloud.