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04/05/2006 | No Relief at the Gas Pumps

Stratfor Staff

U.S. President George W. Bush announced a plan April 25 to mitigate high gasoline prices. None of the proposed measures will have much of an impact on prices this year, and in fact, prices have nowhere to go but up for the next couple of weeks.

 

Bush's first point was to order a probe into price gouging. Though there undoubtedly are some taking advantage of the situation, one of the chief advantages of the cut-throat competition of U.S. retail is that true price gouging is extremely easy to spot -- and impossible to take hold on a national level. So though individuals should of course shop around for the best gasoline prices, there is no reason to be worried about a grand conspiracy to jack prices up. The competition for market share is simply too heated, and the consequences for gouging are simply not worth a sustained risk.

Second, Bush called for an end to tax breaks for major oil firms. Though anything that sticks it to the oil majors might be politically popular, and Bush certainly could use a boost, such actions will do nothing to reduce gasoline prices. In fact, since those breaks were adopted to encourage the development of small or questionable oil deposits in the United States, should Congress heed the president's call it may even exacerbate U.S. energy concerns in the long run. Fewer tax breaks would seem to discourage fresh exploration and production efforts.

Third, the president ordered a temporary summer halt to the filling of the country's Strategic Petroleum Reserve (SPR). Unlike the two previous steps, this one might actually have an impact -- albeit a very small one. The SPR was designed to be the country's emergency crude supply, to be tapped in times of national emergency -- the last such tap was done in 2005 in the aftermath of Hurricane Katrina. The Bush administration had previously pursued the goal of filling the SPR to its full design capacity of 700 million barrels. While diverting the fill to general use will in theory put more crude on the market, the government has been filling the SPR very slowly -- at a rate of only about 50,000 barrels per day (bpd) -- precisely in order to minimize effects on the market, so suspending the fill will also only have a minor effect. Besides, the SPR is for all practical purposes already full; it is only 12.5 million barrels from its maximum capacity.

Finally, Bush ordered the Environmental Protection Agency to suspend regulations requiring clean-burning gasoline. A patchwork of local, state and regional requirements aimed at reducing air pollution in the summer driving months require a variety of unique fuel blends. The complexity and small-scale distribution requirements of such regulations are a major factor behind the sharp increases in gasoline prices during the past few weeks, specifically as refiners, distributors and retailers clear out inventories of fuels that can be crafted in larger runs and bring in new products that must be made without the economies of scale. Had Bush's directive been made before the switchover started in March, this might have shaved more than 10 percent off the cost of a gallon of gasoline (or at least have mitigated increases). But now, in early May, the switchover is well on its way to completion. The change might take the edge off prices, but it is unlikely to do so in any substantial way, and will only do so at the cost of a negative environmental impact -- something that is unlikely to get the president many kudos.

Now this is not meant as criticism of the presidency in general or the Bush administration in particular. Congressional proposals, which can be summed up as efforts to enact windfall taxes on energy firms' profits, are not going to do anything to drop gasoline prices either. There is nothing short-term that any U.S. government, Democrat or Republican, can do to affect gasoline prices. The options that do exist -- such as improved mileage requirements for vehicles, development of alternate fuels such as ethanol as more than merely a gasoline additive, the construction of a dozen or so new refineries or a unification of the country's fuel mix rules -- are long-term in nature and politically sensitive to say the least.

And questions of domestic American stockpiles or fuel regulations aside, the simple fact is that the largest factor contributing to high gasoline prices is something completely beyond the U.S. government's ability to address: high oil prices -- currently at $73 a barrel for Nymex crude. Not only are crude prices unlikely to moderate in the next couple of weeks, but odds are that more increases are actually already in the pipe.

Reasons for such high levels are plentiful.

American, Japanese and Chinese growth is among its fastest in a generation, sustaining high demand for every drop of crude out there. The market is so tight that globally there are only about 1 million bpd of spare capacity -- and what spare supplies do exist are limited to rather heavy, sour oil out of Saudi Arabia that is not well-suited to making transport fuels. Even if the Saudis did ramp up this production -- and there are concerns that they are not capable of it in the first place -- the Saudis themselves assert that bringing it online could take up to 90 days. And of course, oil and gasoline demand both tend to peak in the summer.

Violence related to the upcoming presidential elections in Nigeria is just getting under way (as is the presidential campaign itself, with the election expected some time in 2007); at one point in March, such violence resulted in 600,000 bpd getting pulled offline. The unrest is extremely unlikely to be resolved until after the elections are over. Of course Iraq is as lovely an operating environment as ever, and even on an extremely good day that country only produces 2 million bpd, some 50 percent below its historical highs.

Not all threats are the results of violence, of course. Venezuelan President Hugo Chavez has yet to find a piece of fiery anti-American rhetoric that he has not liked, and creeping nationalization efforts have now resulted in the United States' ExxonMobil, France's Total and Italy's ENI scaling back their involvement in Venezuela because of increasingly hostile tax and investment policies. Venezuela is not facing Iraqi- or Nigerian-style problems, but neither is its oil production going to recover to its once heady 1997 levels of 3.5 million bpd. The Chavez government's legal manipulations have now reduced it to 2.5 million bpd -- and that number slides a little bit every month. But even Chavez has not (yet) followed the path of Bolivian President Evo Morales, who on May 1 simply nationalized the country's petroleum deposits -- a measure that will all but end that country's long-term role in international energy markets.

The biggest concern in the short term, however, is not Nigerian militants or Iraqi instability or Venezuelan rhetoric -- but, ironically, negotiations.

The United States and Iran are about to become involved in public negotiations for the first time since the fall of the Shah in 1979. Officially, those negotiations will be limited to the topic of Iraqi stability and all the ebbing and flowing of political chaos and government formation. Unofficially, the two are hashing out a whole mix of topics surrounding their adversarial relationship. The potential scope for changes in the relationship is massive. After all, both Washington and Tehran have an interest in containing Arab activities throughout the Middle East.

As one would expect during such critical negotiations, public rhetoric is used as a tool to shape expectations, affect opposing lines of reasoning, increase one's apparent bargaining position and so on. Thus, Iranian President Mahmoud Ahmadinejad -- never timid about talking his way into the global spotlight -- has been dropping quite a few gems ranging from the now nearly passé Holocaust denials to threats to use the oil weapon in general or seal off the Persian Gulf from tanker traffic in particular.

With the Iraqis lurching toward having a fully Iraqi government without the word "provisional" in front of it, the endgame is near in both Iraqi politics and U.S.-Iranian negotiations -- which means the rhetoric will likely only get more fantastic along the final stretch. And as such, it is this factor more than any other that will add the proverbial fuel to the proverbial fire heating up oil prices in the days ahead.

Fortunately, that means that the Iranian issue -- while destined to push prices even higher for the next few weeks -- will likely become less a factor in the oil equation once the negotiations conclude.

Unfortunately, Iran's Persian Gulf politics will likely fade into the background just as events in the other gulf return to the fore. That other gulf is the Gulf of Mexico.

There are two things one should keep in mind. First is that the hangover from the 2005 hurricanes is not over: Damage from Hurricanes Katrina and Rita is still blocking some 300,000 bpd of Gulf of Mexico crude oil from reaching the market. Second, hurricane season officially starts June 1 (though it could certainly begin unofficially before then).

Yes, ladies and gentlemen. Here we go again


CHINA: The Chinese central bank raised interest rates April 28 and called on banks to restrict their lending in order to get breakneck growth under control. China's problems are twofold. First, the coastal growth that has fueled the past 30 years of economic development is becoming increasingly inefficient. Second, the government is attempting to shift development efforts to the poor inland provinces. The rate adjustments and loan requests are an effort by the central government to achieve both goals. Alone, this measure will fail.


LATIN AMERICA: Trade policies in Latin America are undergoing massive evolutions with the United States nearly at the end of its free trade agreement (FTA) negotiations with Colombia, Ecuador and Peru at the same time that Paraguay and Uruguay are arguing for a fundamental redefinition of the Mercosur trading block. Not to be left out, Venezuela is working to ingratiate itself to Mercosur -- which Caracas sees as a counterweight to the North America Free Trade Agreement -- while pulling out of the Andean Community of Nations and announcing trade barriers against states that enter into FTAs with the United States. Venezuela has also penned a counteragreement with Cuba and Bolivia: the People's Trade Agreement. The Caracas-Washington cold war now has a very clear economic axis.


EUROPE/RUSSIA: Europeans' efforts to shield their energy markets from Russian control have generated a great deal of anger in Moscow, with Transneft President Semyon Vaynshtok, Gazprom CEO Alexei Miller and even Russian President Vladimir Putin expressing their irritation at Europe's protectionist measures. Russian state energy firms -- particularly natural gas behemoth Gazprom -- want to penetrate the European market and extend the natural gas supply network to include distribution and retail. The Europeans fear that additional Russian control over European energy will grant the Kremlin too much control over European political decisions (Gazprom already supplies one-fourth of all natural gas used in Europe).


RUSSIA/GERMANY: Russian President Vladimir Putin and German Chancellor Angela Merkel met in the Siberian city of Tomsk and concluded several energy, banking and transportation agreements. Other European states -- particularly Poland -- were not enthused, with Polish Defense Minister Radek Sikorski noting that the style of Russian-German diplomacy is moving away from multilateral settings and could be compared to the 1939 Molotov-Ribbentrop Pact.


BOLIVIA: Bolivian President Evo Morales made good on his past five years of promises and nationalized the country's energy deposits and expropriated several energy-related facilities, while hiking tax rates on remaining investments as high as 80 percent. The move ensures that Bolivia's small role in global energy markets will quickly wither.


UNITED STATES: More than 1 million immigrants in the United States marched to protest policies that they perceive would weaken their ability to freely migrate to and from the United States. Though the U.S. economy certainly benefits from a loose migration policy and though the marches were peaceful, the assertion of a right to immigrate without management from the American government is one that will certainly trigger a backlash from Washington and state capitals.

Stratfor (Estados Unidos)

 



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