The growing possibility of a sharp decline in world oil prices helped send the stock market skidding to its worst loss in three months yesterday and fueled a growing debate among economists about whether the United States would emerge a winner--or once again a loser--from a shift in the fortunes of the Organization of Petroleum Exporting Countries (OPEC).
A variety of economists interviewed yesterday said a gradual decline in the nominal price of oil on balance would be good for the country. But most thought a sharp drop in petroleum prices could cause serious problems for a number of important sectors of the American economy, including the oil, banking, coal, natural gas and synthetic fuels industries.
"In the long term, lower oil prices would mean greater economic growth for the American economy," said Eric Zausner, who heads the energy division of the consulting firm Booz-Allen & Hamilton. "But in the short term, most of the effects would be negative.
"The irony is that when oil soared to $34 per barrel, people said how bad it was for the U.S. economy. And now that it may go back to $25, people are saying how bad it would be for the American economy. Well in both cases, they were right, because any sudden change causes short-term economic dislocations."
Yet most economists agreed that American consumers will see themselves as benefiting at least modestly from a continued fall in the price of gasoline and home heating oil, which would leave them with money to spend on other things.
"My feeling is the sharp increase we had in energy prices really acted as a tax on American business and consumers, and a decrease would act as a tax deduction," said John C. Sawhill, a former federal energy administrator and now senior partner with the consulting firm of McKinsey & Co. "I believe it would be very stimulative to the economy."
Sawhill also suggested that a drop in oil prices should help both the airline and trucking industries. Zausner said lower oil prices should "increase the competitiveness of our petrochemical industry and keep it U.S.-based longer."
But those that might be adversely affected include:
The banking industry. If the price of oil drops $10 per barrel, noted New York petroleum consultant Walter Levy, "the revenue of Mexico goes down by $7 billion. Mexico, Venezuela, Indonesia, Nigeria and Canada would be unable to cover their debts."
A senior official with a major New York bank said yesterday that if Mexico announced it could not pay the interest on just 20 percent of its loans, Chase Manhattan, Citibank and Bank of America stand to lose about $60 million each this year in interest. "That would be very dangerous," he said. "Not every bank can afford to lose $60 million."
* The oil industry. "There's no question it would further depress profits of the oil companies, and make some domestic drilling much less attractive than it is today," said Sawhill.
Levy said he felt the growing profit pressures on oil companies would force them to "cut back severely" on exploration. He further suggested that service industries selling such equipment as oil drilling rigs "would find themselves virtually out of business."
* The coal industry. "A sharp decline in oil prices would have a significantly negative impact on coal use," Zausner said. "When a company looks at converting from oil to coal, it looks at the total cost of a coal plant compared to continuing oil use. Coal conversion is economic only if oil prices continue to accelerate."
* State governments. Beyond the fact that several states depend heavily for revenue on oil royalties, a government economist noted that when the price of gasoline was rising, several states switched from a fixed cents-per-gallon tax to a sales tax.
"If prices fall sharply, states are going to be collecting less revenue than they expected," the economist said. "Given the strapped financial position of a number of states right now, that could be quite damaging to them."
* The natural gas industry. A sharp decline in oil prices, said the government economist, "will introduce all kinds of problems for natural gas producers and pipeline companies, further exasperating the problems we already see."
Recent sharp increases in gas prices have already sharply reduced the demand for gas, putting a strain on companies that are locked into taking large amounts of high-priced gas. "Lower oil prices would increase the pressure on Congress to do something about these long-term contracts for gas," Zausner said.
* The synthetic fuels and conservation industry. "An expectation of rising oil prices was the driving force behind the synfuels industry," observed Zausner. Both he and Sawhill suggested that the synfuels industry already is close to dead. Several suggested that a sharp drop in oil prices would have a negative impact on conservation in the United States.
* The U.S. auto industry. "A decrease in gasoline and heating oil prices to U.S. consumers would increase the disposable income of Americans, and that could lead to an increase in the demand for autos," a top goverment economist said. "But the demand for bigger autos might pick up again and Detroit might not be too happy to see that."
Zausner noted that U.S. auto makers have invested an enormous amount of money in switching to production of more fuel-efficient cars. "Probably the thing that would hurt Detroit the most now is if people stopped buying them," he said.
A number of analysts also expressed concern about the foreign policy implications inherent in the impact a sharp drop in oil prices might have on some of America's friends and allies.
Levy noted that Britain is heavily dependent on North Sea oil. "A sharp drop in oil prices would have very bad consequences for the pound sterling and the British economy."