Guest Writings
27/08/04 BUSH'S GAS PUMP GAMBIT: Are Major U.S. Oil Refiners and Distributors Holding Back Price Increases Until After the Elections? Mark G. Levey

The Bush Administration is putting a happy face on the near-doubling of the world price of crude oil to $50 a barrel during the last 18 months, a price explosion brought on by the Iraq War and other bungled adventures in petroleum producing countries. Here's the spin: it's an economic stimulus package.

On Saturday, Aug. 21, The New York Times carried an interesting article by business writer, Eduardo Porter, “An Oil Shock That Could Be an Economic Stimulus in Disguise”. Porter suggests the oil price spike means the Federal Reserve is unlikely to substantially raise interest rates, which will extend the U.S. borrowing binge in spite of historically high costs of energy imports and the growing trade imbalance. []

Unless you're Vladimir Putin, a Saudi sheikh, or a Halliburton executive, the economic logic in this may seem more than a little perverse.

It all comes down to a false perception that cheap energy is going to continue forever for America. The Bush Administration has some powerful friends interested in maintaining this charade. In April, the White House denied Bob Woodward's report that Saudi Ambassador Prince Bandar, a long-time Bush family friend, pledged that “over the summer, or as we get closer to the election, they could increase production several million barrels a day and the price would drop significantly.” []

While there are no reliable measures of actual Saudi crude production, oil traders are skeptical the Saudis can quickly bring large amounts of new oil to market. The Russians also did their part to pull the rug out from under the Bandar-Bush deal. As a result of this, and the failure of the Administration's strategy to effectively control exports from Iraq and Venezuela, crude prices escalated steeply over the summer, nearing the psychologically important $50 a barrel level this past week.

If gas prices were keeping pace with crude oil prices, Americans would be paying nearly $3.00 a gallon for unleaded regular. Nonetheless, domestic pump prices dropped to an average of $1.87 last week from their May highs of $2.06. That's nearly a forty percent discount. What appears to have happened is that domestic prices of motor fuels somehow decreased dramatically during the “peak summer driving months”. That doesn't normally happen – not in a market that is operating according to market forces. Gas prices usually go up and inventories go down during the summer. By July, domestic refineries are usually switching over to fuel oil production. But, not this year. Meanwhile, fuel oil is up twenty percent since May, a matter of concern for anyone who has to write a check to heat their home this winter. Diesel has risen thirteen percent. Why is this occurring now?

The strange failure of gas prices to rise this summer has a lot to do with growing stocks of high-priced imported petroleum that have filled U.S. storage reservoirs. This summer, supplies on hand averaged more than 300 million barrels, an increase of some 20 million over the year before. [See,'1-Crude Oil Stocks'!A1]

U.S. refiners and distributors also imported huge amounts of high-priced oil, averaging more than 10 million barrels a day. On July 23, daily imports peaked at a record 11.324 million barrels. During the previous summer, imports averaged around 9.5 million barrels a day. There was also a substantial rise of refined products on the U.S. market, enough to cover the actual increase in demand. Overall figures for U.S. gasoline consumption, production, imports and amounts of product supplied rose together about 150,000 barrels a day over the levels of the previous summer. People are burning up more gas this year than last, and there is proportionally more supply, but not by a wide margin. Nothing in the EIA's published petroleum statistics would point to a big decline in prices due to huge oversupply of gasoline on the domestic market.
[See,'1-Gasoline Production'!A1'1-Gasoline Product Supplied'!A1

Instead, the U.S. oil companies are doing what they always have, making huge profits by timing the global market. As the value of crude oil has risen dramatically this year, so have the majors increased their supplies on hand, which are being banked.

Meanwhile, however, the spot market for gasoline has behaved in a most unusual way in recent months, as it did not reflect the normal mid-summer rise in prices. This is in stark contrast to the gavel price of heating oil that has jumped up 20 percent, tracking the rise in West Texas Intermediate (WTI) crude. See below.

Spot Data:













































[Source: DOE, EIA,]

Contrast that, as well, with the path of gas prices last year, which followed the usual pattern. In 2003, which was a fairly normal market, the spot price on April 16 started at 81.43, rising to 93.43 (7/11), 103.17 (8/14) and peaking at 112.13 (8/21) before falling off to 88.95 in the autumn (9/3).

Spot market prices in 2004 for conventional unleaded regular have been anything but normal. The April 16 price started at 112.38 then spiked to 140.42 (5/19), thereafter plunging to a summer low of 107.41 (6/29) before rebounding somewhat to a range between 125.69 (7/12) and 129.43 (8/13). The last available quote was 126.04 on August 17. This is a strange pattern that defies the summer norm. [See,'1-Conventional Regular Motor Gasoline'!A1 ] ]

This drop in spot market prices for gasoline is particularly strange in the context of rising world crude costs. The spot price fell ten percent from May to mid-August. During the same period, the price of world crude oil went up from about $35 a barrel to more than $45, an increase of one-third. By the way, the retail cost of another distilled product, diesel fuel has tracked the rise upward of crude, but gasoline has not. How does one explain this curious outcome?

Retail Data:


































[Source: DOE, EIA,]

The obvious answer is very selective price restraint by retailers, distributors, and refiners – a small investment in the continued employment of a certain transplanted Texan who has made the industry many billions since January 2000. The cost of this little cushion against consumer panic will run about a quarter of a billion dollars over six months. Chump change, really, compared to the $250 billion in increased industry revenues borne by the consumer since January 2000. Last year, the after-tax profits of the five largest oil companies operating within the United States-ExxonMobil, Chevron-Texaco, ConocoPhillips, BP, and Royal Dutch Shell-were in excess of $60 billion. [See, Aran Gupta, “Manipulation of Gas Prices”, ]

But, this year's pre-election dip in gasoline prices have bought temporary relief to Americans, who had seen gas prices rise 40 percent since 2002 before they were eased back. By comparison, pump prices shot up from about 75 cents a gallon to more than $1.40 in the period leading up to the 1980 election. That would be a jump to $4 a gallon in today's dollars.

Not all economists and news reports are so sanguine about the current energy situation. The Washington Post reported on August 20, “'The economy is near its tipping point,' Stephen S. Roach, chief economist for Morgan Stanley, said yesterday. He said the nation would likely fall back into recession if oil prices hover near $50 a barrel for three to six months.” That would be conveniently after the November election. [See, Nell Henderson and Justin Blum, Washington Post, “'Oil Shock' Has Some Economists Worried”, August 20, 2004; Page E01,

With global oil supplies tighter than at any time in the last quarter century, and US deficits at an all time high, we are indeed approaching a tipping point. The US is by all standards already in an international accounts crisis – we are paying out far more for relatively expensive imports than there is a demand for US-made goods and services. This imbalance threatens to upend currency markets and global trade next year. The U.S greenback has already dropped 20% in value during the past two years, which in part accounts for the rise in crude oil prices that are valued in US dollars on international markets. A steeper drop in the dollar will make energy imports all that more expensive, what economists call a vicious-circle of price-inflation. A huge rise in the world price of oil versus the U.S. Dollar indeed threatens another steep American recession, one that will be even more global in impact than the ones that occurred following the energy crises of 1973-74 and 1979-80. Rising global energy consumption and costs threaten to suck the entire world economy down, the U.S pulling the smaller boats with it.

American consumers have been surprisingly calm about rising energy costs during the Bush years. There may be a false sense of security and entitlement attached to this oil-bound Administration. In fact, things are not really as under control as they may appear through the lenses of the networks. The cost of a gallon of gasoline has risen about 40 percent nationwide since January 2003. But, that's a huge discount compared to world crude prices, which have skyrocketed from $30.32 during the same period.

The energy markets don't normally operate that way – prices for similar products are supposed to rise and fall together in some sort of parity. Divergences of this scale are rare, and usually mean that suppliers or speculators, or both, are manipulating prices. Eventually, in markets that operate freely, prices reconcile through arbitrage, despite the election year promises made by certain Ambassador to an American President. The $500 billion question is: when will prices re-converge, and what will that do to the dollar and inflation?

The story of rising energy prices has been all but buried in the business pages. The average consumer has shrugged off price escalation at the gas pump. The Commerce Department doesn't even measure consumer energy costs in its standard gauge of inflation anymore. Unless you live on the West Coast, where Enron cornered the electricity and natural gas markets, you might not even have noticed. Until American consumers open their heating bills later this year, they won't take much notice of what's going on. By then, it is hoped in the glass towers of Houston and Ryadh, G.W. Bush will have been safely reelected.
Even the U.S. Department of Energy acknowledges that the current pricing structure is not in keeping with rational market behavior. “Earlier expectations for a potential bumpy road for summer gasoline markets were well reasoned based on gasoline and other petroleum market conditions in early spring.” TheEIA weekly report states that most industry analysts had predicted that gasoline prices would have continued rising this summer:

“With only a few weeks remaining in the peak summer driving season that typically spans the period between the Memorial Day and Labor Day holidays, analysts' expectations of a summer gasoline supply crunch following a tight spring never materialized. The dramatic turnaround in gasoline markets that went from record high retail gasoline prices and below average inventories at the beginning of the driving season to a level of lower retail gasoline prices and higher inventories near the end of the peak summer driving season, was a major surprise to many industry analysts, who expected gasoline markets to continue to tighten over the summer in the face of strong U.S. demand for gasoline, the potential for crude production disruptions, and strong oil demand growth, particularly in China.” []

But, it wouldn't be the first time that Bush's major backers in the energy industry and the corporate media have played politics with prices and America's growing dependence on imported oil.

This has all happened before, but in reverse. It started with the fall of the Shah of Iran in January 1979 and ended 20 months later with the defeat of Jimmy Carter. For those not old enough to remember the “gas crisis” that accompanied the lead-up to the 1980 elections, the only thing that went up faster the price of a gallon of unleaded regular during that period was the volume of media hysteria about an oil shortage that didn't really exist. In fact, there was plenty of supply on hand inside the U.S., much of it just didn't reach the consumer in the way it normally does. The actual shortages occurred on the retail gasoline market, as refiners held onto crude stocks and supplies of refined product were withheld by U.S. distributors. Some may remember the network news footage of oil tankers sitting low in the waterline anchored outside of the 12-mile limit. The sense of crisis was compounded by alternate-day rationing schemes that had drivers lined up for gas before dawn. It's remarkable how different the mood is today, despite a global supply situation that is tighter today than it was 25 years ago. Today, no panic, no problem.

The difference this time is that the domestic retail gasoline prices have lagged behind the steep rise in world crude market prices, something that did not happen before. There is no ready explanation for this lag. Perhaps, for their own reasons, the major U.S. retailers are exercising more price discipline with gasoline in the months leading up to the election, in the expectation that they'll make it up with a steep jump in fuel oil prices this coming winter.

After the November elections, the Kerry Administration might want to look into just what went on in the domestic energy market this summer. That is a necessary step toward removing the sharks from the driver's seat of the U.S. economy.

Happy motoring.
Mark G. Levey

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