In sympathy to everyone worried about high prices, it must be said that the oil market has been especially bewildering lately. But that’s no reason for anyone to accept demagogy.
US Sen. Charles Schumer (D-NY) parlayed confusion into farce on May 31 when he announced in a press release that he had signed a letter to the Federal Trade Commission 2 weeks earlier demanding an investigation of refiners.
Instigated by Sen. Claire McCaskill (D-Mo.), who said she was responding to a newspaper article, the missive expressed suspicion about high gasoline prices, refining margins, and oil company profits coincident with low refinery utilization and gasoline stocks.
“The idea that refiners might be manipulating the market to keep prices artificially high is offensive,” said the letter, signed also by Democratic Sens. Dick Durbin of Illinois and Patty Murray of Washington.
Business responses
Critical thought should have defrayed the outrage. Why, for example, construe healthy refining margins as evidence of price manipulation? If refiners really could guarantee themselves comfortable margins by manipulating market forces, wouldn’t margins be healthy all the time, which they are not? Wouldn’t refiners, if they could, at least keep margins from becoming negative, which they often are? What the senators portrayed as manipulations are in fact aggregate indicators of individual business responses to market forces no one can control.
The letter writers at least saw fit to mention flooding in the US Midwest, which idled refineries and helped explain low capacity-utilization rates and withdrawals of gasoline from storage. They also might have taken note of unplanned refinery outages unrelated to flooding, which amplified the effect. But that would have blurred the story line.
In their letter, the senators also acknowledged costly crude oil as a factor in elevated gasoline prices but didn’t trouble themselves with complexities in that realm. To say their analysis suffered as a consequence would be charitable.
Now an “asset play” for investors, oil has become increasingly subject to macroeconomic pressures, including fluctuation in currency values. The Centre for Global Energy Studies, for example, recently pointed out that new questions about the creditworthiness of Greece have suppressed the value of the euro against the dollar, lifting oil prices. Yet not long ago, CGES adds, when the US administration decided interest rates should be kept low to sustain economic recovery, the dollar faltered, and oil prices rose.
Then there’s China, which, CGES notes, accounted for 37% of incremental oil demand worldwide over the past decade. Inflationary pressures there portend higher interest rates and consequently lower economic growth, which would dampen demand for oil and, if supply doesn’t decline, depress oil prices. “It is thus easy to draw notional lines between the US’s trade balance (China is the US’s main trading partner), the dollar-renminbi exchange rate, China’s counterinflation policy, its demand for oil, Europe’s debt problems, investors’ expectations, the euro-dollar exchange rate, and the price of oil,” CGES says.
Refiners must base operating decisions on feedstock costs subject to these dynamics in relation to realities of local product markets and of whatever logistical constraints might, at any given time, prevail. Against this complex backdrop, political melodrama based on an ephemeral snapshot of cherry-picked indicators becomes especially misleading.
‘Stockpiling oil’
Schumer compounded the offense with what he ignored in his press release complaint about “clear signs that refiners may be stockpiling oil, which keeps prices high.” He must be referring to gasoline prices, high in his view because refiners are nefariously storing rather than distilling crude. But he fails to account for oil piling up at the pricing hub at Cushing, Okla., because of new inbound supply and limits on takeaway pipeline capacity.
This simple physical fact is crucial to understanding the US oil market. It explains much about high inventories of crude oil and margins of lucky Midwest refiners.
The explanation contradicts presumptions about conspiratorial refiners, though, so don’t expect to hear anything about it from Schumer or his partners in deception.
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