Lower oil prices cause unexpected difficulties for Government and industry
For nearly a decade, escalating energy prices have sapped the economies of industrialized countries, spurred long and steep inflation, and sent hundreds of billions of dollars flowing into the treasuries of a handful of oil producers. Now the combined effects of recession and conservation have sharply curbed demand for oil and forced the most serious price break since the Organization of Petroleum Exporting Countries quintupled the cost of crude between 1973 and 1975.
The new world of lower energy prices, though, is presenting new and different challenges to both Government and industry. Cheaper oil could undermine the incentives to save and conserve that have led to the drop in prices. Moreover, it might reduce the willingness of oilmen to take large financial risks to search for new oil supplies. Gyrating prices might also play havoc with the ability of businessmen to plan their investments or even know what their operating costs will be from one day to the next.
Over the short term, the softening price of oil has certainly been good news for hard-pressed consumers. Every $1 per bbl. drop in petroleum prices gives them $5.5 billion to $6 billion in increased purchasing power. That is because oil is by far the most important and widely used energy resource in the economy, going into everything from automotive fuel to farm fertilizers, plastics and paints.
From January 1979 to January 1981, oil prices shot up approximately 150%, and the rise sent American consumer prices leaping at an annual rate of more than 12%, the steepest peacetime increase in more than 30 years. Since April of last year, though, petroleum prices, which had briefly gone to more than $41 per bbl. for high-quality crude, have declined slightly to approximately $33 per bbl. Moreover, in recent months prices have actually begun to slip somewhat on the unregulated spot market, where crude was last week selling for as little as $30 per bbl. As a result, consumer prices have ceased spiraling upward, and in February they climbed at an annual rate of only 2.4%. Last week the Labor Department reported that wholesale, or producer, prices fell at an annual 1.7% rate during March, matching an equal decline in February, for the first such two-month drop in the index since 1976.
There is also, however, an unwelcome side to the drop in oil prices for Reagan Administration policymakers. Michael Evans, a private Washington-based economist, forecasts that a $10 per bbl. drop in the price of oil would cost the Treasury as much as $40 billion in lost revenues from the windfall-profits tax that President Jimmy Carter levied on the oil industry two years ago. Prices so far have dropped $4 per bbl. Those losses would add billions of dollars more to the 1983 deficit, which congressional economists now expect to top $120 billion.
As a result of the sliding price of crude and the rising deficit, the White House is actively considering a variety of tax proposals that would both raise revenue and keep consumption from jumping up again. Proposals under consideration include a $5 or $10 per bbl. surcharge on imported oil and an increase of 50 in the federal excise tax on gasoline. President Reagan has yet to indicate his position on these staff proposals.