Falling US fuel prices ease fears of recession

Even with OPEC's decision this week to cut oil production, lower energy prices could persist – bringing a welcome boost to the economy.

The "oil dividend" is worldwide but comes at a sensitive time for the United States. By easing costs for heating homes, commuting, and running factories, lower energy prices reduce worries about a possible recession for the world's biggest economy.

Lower energy prices also promise to help fight inflation. According to a report Tuesday gasoline prices posted a record one-month plunge of 22.2 percent. And Wednesday, thanks in part to fuel costs, the Labor Department announced its broad index of consumer prices fell 0.5 percent in September.

"The lower energy prices certainly help," says John Silvia, chief economist at Wachovia Corp. in Charlotte, N.C. This doesn't assure a so-called soft landing for the economy, he says, but "it's enhancing the chances."

Crude oil still costs twice what it did three years ago, but the change over the past two months is significant. Motorists could soon be pumping gasoline at $2 a gallon, down from summer highs above $3.

Cheaper natural gas, meanwhile, promises to keep heating bills lower this winter, too.

Over the past two months price shifts in gasoline and natural gas have put some $90 billion, annualized, back in US consumers' pockets, according to research by economist Andrew Tilton at the investment firm Goldman, Sachs. That's sizable even in a $13 trillion economy.

By some estimates, the amount more than offsets the hit homeowners are taking from an upward jump in adjustable mortgage rates.

Several factors explain the softening of energy prices, from the end of the summer driving season to fewer hurricanes, which could affect drilling platforms in the Gulf of Mexico.

Perhaps the biggest factor, however, is cooling demand for fossil fuels. That reflects some conservation by consumers, but it also stems from a slowing economy – the very problem that lower energy costs are now helping to alleviate.

"Demand continues to grow but at very low rates," says Mark Routt, a senior analyst at the consulting firm Energy Security Analysis Inc. of Wakefield, Mass.

America's output of goods and services, after expanding faster than 3 percent annually in 2004 and 2005, slipped to a 2.6 percent annualized rate in the second quarter, and third-quarter numbers are expected to be slower still.

Even as Chinese energy demand continues to soar, forecasters have pared back their outlook for the US, the biggest oil consumer.

The International Energy Agency last week predicted that world oil consumption will rise 1.2 percent this year and 1.7 percent next year. Those numbers shaved just a tenth of percentage point off prior forecasts, but such changes at the margins make a difference in energy prices.

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