With gasoline prices headed "up, up, up," Democrats are fulminating about oil industry collusion, badgering President Bush to "do something," and continuing to allege dark dealings between Vice President Cheney and the energy industry over energy policy.
Today's Wall Street Journal has a useful summary of current factors in world oil supply and demand.
What has happened over the past 10 months to ruin forecasts of oil at $22 per barrel? The short answer is plenty.Most important, demand has skyrocketed. Not only in the U.S., where economic growth has been gangbusters, but also in China, which has leapt ahead of Japan to become the second largest oil market in the world. While there is some debate about whether China is consuming oil or using it to build a strategic stockpile, the result is the same strong demand. China's growth has also sparked an economic recovery and higher oil demand in the rest of Asia. Count India, too, as an increasingly oil-thirsty economy.
This roaring demand has not been met with increasing production. Blame that mostly on OPEC. The oil cartel has been smarting over the fall of the dollar against the euro. That, of course, reduces dollar-denominated oil revenues and increases the incentive to keep supplies tight. With prices at or above $28 per barrel--the upper-bound of OPEC's target range--the Saudis, for example, ran a budget surplus for the first time in decades.
Inventories are also low. The U.S. has not yet recovered from the disruption in crude and refined products from Venezuela last year. And tight inventories exaggerate any changes in supply at the margin.
As the market got tighter, several events have injected uncertainty. Russian President Putin created some political risk by clamping down on the oil industry and arresting the former head of Russia's largest oil company, Yukos, and accusing a second company of tax fraud. There has been continued instability in Venezuela, Nigeria and Indonesia. It also hasn't helped that Royal Dutch Shell announced it was lowering, by 20%, its estimate of reserves. And there have been questions raised about the size of Saudi reserves and the possibility that Saudi production might be peaking.
Now throw in a big bunch of uncertainty ahead of tomorrow's OPEC meeting. Although OPEC only has a 33% market share, history shows it is able to generate more than its share of speculation. Several weeks ago, OPEC announced it would cut production, then two members balked, and now OPEC is hemming and hawing. Speculators have been going nuts.
Meanwhile, the Houston Chronicle describes the nation's refining capacity as "stagnant" -- something industry experts know well but about which the general public remains woefully ignorant.
Gasoline may cost 25 cents a gallon more during the summer than now, in part because the demand has outstripped what domestic plants can refine, but motorists shouldn't look for relief in the form of a building boom anytime soon.Refiners admit the tight market has been good for bottom lines, but they have a long list of reasons not to start major plant expansions.
Normally, high profits inspire higher production capacity. But between now and year-end 2006, refiners say they will be spending billions of dollars on things other than expansion.
Industry officials all say the cost of meeting clean-fuel rules diverts money that could be used for new construction. To make matters worse, the methods used to take out sulfur to meet the specifications also reduce the amount of gasoline that can be made from a barrel of crude.
This burgeoning gap between a flat domestic supply and a growing demand from big gas-hungry vehicles has been filled by imported fuel. But even this source has been crimped by environmental rules that took effect Jan. 1 preventing some of this imported fuel from being sold here.
Although some companies are expanding plants, the barrel amounts involved are relatively small compared with the industry total. And there are some small refineries that may close rather than comply with the new rules.
No new refinery has been put up in the United States since 1976, and building one is out of the question, in [refining executive Bill] Greehey's view.
"Even if you could get the necessary permits, which I don't think you could, it's just too expensive to build a new grass-roots refinery anymore," he said.
That's right, folks -- not one new refinery built since 1976, mostly due to relentless opposition from environmentalists and other utopians who want higher prices in the vain hope of suppressing demand for gasoline-burning vehicles.
Posted by Alan at March 30, 2004 12:15 PM