January 30, 2009 / 4:46 PM / 11 years ago

Oil price slump a challenge to Obama energy agenda

NEW YORK (Reuters) - A slide in oil prices may be good for consumers battered by the U.S. economic slowdown, but it could pose a challenge for President Barack Obama’s ambitious plan to revolutionize America’s energy use.

The Valero St. Charles oil refinery is seen during a tour of the refinery in Norco, Louisiana in this file photo from August 15, 2008. REUTERS/Shannon Stapleton

Obama’s plan — outlined during the campaign last year when oil prices hit a record $147 a barrel — calls for doubling U.S. alternative energy use within three years while easing reliance on foreign oil.

Oil prices have tumbled to around $40 a barrel, easing the urgency to solve America’s energy crisis. Analysts now say bigger government subsidies will be needed to lure private investment into less economical green fuel projects.

“Low oil prices are a very real danger because they do make alternative energy less commercially viable,” said Peter Beutel, president of Cameron Hanover.

“We need the government to subsidize solar, wind, ethanol, etc. to make them commercially viable enough to survive this price environment.”

The slowing economy has already started to take a toll on alternative energy projects that looked promising in 2008 when oil costs were soaring.

U.S. wind power capacity in 2008 grew by its fastest rate ever, but development slowed to a trickle late in 2008 as the credit crunch hit. Several ethanol plants have been closed as profits turned to losses with falling oil prices and volatile prices for corn, the main feedstock for U.S. ethanol.

“The problem is that financing has dried up, so the best thing that Washington can do — and this is being discussed as part of the stimulus debate — is to provide direct financing support,” said Pavel Molchanov, analyst for Raymond James and Associates.

Green energy advocates said steps taken so far as part of the economic stimulus package look promising.

The Senate Finance Committee this week approved $31 billion in tax credits and financial incentives to boost alternative energy supplies and promote conservation.

The plan includes most of the $20 billion in energy tax breaks cleared last week by the House Ways and Means Committee, plus more incentives to help alternative energy companies.

“If your company doesn’t qualify for the tax credit you would be eligible for a grant program,” said Molchanov. “Hopefully that will be in the final recovery package.”

Still, analysts worry the price drop could send Americans back to their wasteful tendencies, after high prices at the pump encouraged consumers to drive less and turn in their trucks and SUVs for more fuel-efficient vehicles.

“We’re already seeing some shift backward as a result of lower oil prices, with movement back toward SUVs and away from hybrids,” said Jim Ritterbusch, president of Ritterbusch & Associates.

“The push toward renewable fuels has been lessened.”

Other analysts argued that while the economics of alternative energy projects may be depressed by the drop in oil, lower crude prices will not last forever.

Crude demand — and prices — are expected to pick up once the economy starts to rebound.

“It’s bad now because prices are low but I don’t think there’s a forecaster who doesn’t think prices are going to go back up,” said Sarah Emerson, director of Energy Security Analysis Inc (ESAI). “By the time all of this is implemented prices will be back up at $60 or $80 anyway.”

A petrol station employee fills the tank of a car near a price board in Nanjing, Jiangsu province in this file photo from December 19, 2008.REUTERS/Sean Yong

In addition, the drop in prices could give the Obama administration some breathing room to develop his energy plan.

“Lower oil prices are giving us a period of less urgency in which we can make a well-though out transition from traditional energy to different forms of energy,” said Beutel.

“All the lower prices have done is take the loaded gun away from our temples and place it on the table in front of us. But the gun is still loaded.”

Additional reporting by Timothy Gardner; Editing by David Gregorio

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