Those falling oil prices

I couldn’t help smiling when gas prices dropped below $3 per gallon for the first time in years here in the high-tax Northeast where I live. As with many men, gas is the one price I follow intensely; I don’t shop for anything else. Watching the numbers slip below $3 was like counting the days until Christmas as a kid. Did I mention that it has already snowed twice in Philadelphia, and my family and I heat our house with oil?

The stock market hasn’t been quite so ecstatic. After one recent drop in the price of crude, the Dow Jones average tumbled several hundred points. What in the world did that mean? Does the market hate Christmas?

Actually not. Lower oil prices have been a godsend for many families’ budgets, and they are giving a much-needed jolt to the economy. But the stock market reaction seems to reflect a pair of worrisome reasons for oil price decline.

The first is decreasing demand for oil from many countries in Europe and Asia. These countries don’t need as much oil as they did a year or two ago because their economies are stagnant. Europe has been in a funk since the Great Recession of 2008, and Japan may be sliding back into recession. This could be bad news for U.S. exports, and the stock market has been taking note.

A long period of low prices also could spell trouble for the U.S. energy industry. Many of the most remarkable innovations in U.S. energy technology in recent years have been spurred by years of high oil prices. Falling oil prices will squeeze some American energy companies, and the Organization of Petroleum Exporting Countries knows it. Rather than propping oil prices up, as it usually does, OPEC has let them fall, hoping to cripple the resurgent American energy industry. It’s one thing when businesses struggle because they aren’t as efficient as their competitors. That’s how markets work. But it’s quite another thing when a monopolist is manipulating the markets. We have other names for that.

I doubt that the Obama administration will treat this as an opportune time to remove unnecessary costs from American energy production. But it should. If the Keystone Pipeline is cheaper and safer than alternatives such as rail and trucks that are being used in its absence, as seems to be the case, now is the time to let the pipeline go forward.

Making oil as cheap as possible isn’t always the best goal. I think the argument for a “carbon tax”—a tax to cover environmental harm caused by oil or coal—is quite compelling. But this doesn’t justify imposing unnecessary costs (or the unrelated taxes that push up prices in many states) on the price of oil.

The price of oil definitely is a lot more complicated than it looks. I think I better keep studying those gas station signs closely. And when the price of oil starts rising again, as it surely will, I plan to remember the nice little Christmas present we got this year.