Politicians ponder price peak

The July contract for benchmark US light, sweet crudes traded above $135/bbl on NYMEX just prior to the May 26 Memorial Day holiday in the US that marked the unofficial start of the summer driving season.

Sam Fletcher
Senior Writer

The July contract for benchmark US light, sweet crudes traded above $135/bbl on the New York Mercantile Exchange just prior to the May 26 Memorial Day holiday that marked the unofficial start of the summer driving season in the US.

With oil prices setting record highs almost daily, some developing countries such as Indonesia and India are having trouble maintaining fuel subsidies for their citizens. As a result, gasoline prices were expected to increase 20% in India and up to 30% in Indonesia. In an election year in the US, however, politicians are pressuring everyone from US oil companies to the Organization of Petroleum Exporting Countries to increase production, which they hope will lower retail prices for gasoline, diesel, and fuel oil, thereby encouraging US consumers to consume more.

In an attempt to show constituents they are taking action against rising prices, the US House passed legislation to stretch US antitrust laws to include members of OPEC. Critics claim targeting OPEC investments in the US as a source of damage awards in such cases could trigger an embargo of oil to the US.

Meanwhile, the Senate Judiciary Committee rounded up the "usual suspects"—executives from ExxonMobil Corp., Chevron Corp., Shell Oil Co., BP America, and ConocoPhillips—for a televised verbal flogging. The next day, a House panel took its turn at berating oil executives. But even as the public and politicians bashed the "excess profits" of oil companies, Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, noted per-share prices of many publicly traded refining firms have fallen by an average of 50% since mid-2007 (vs. a 7% decline in the S&P 500) due primary to weak demand for gasoline and other refined products. "Poor fundamentals have reduced earnings and cash flow for all refiners, especially the companies that cannot process a significant amount of heavy and sour crude oils," Rousseau said.

Industry representatives and some politicians are pushing a reluctant Congress to open areas of the US now off-limits for oil and gas drilling. "Democrats argue that drilling the potential reserves on and offshore won't necessarily ease pressure on prices," said analysts in the Houston office of Raymond James & Associates Inc. "New technology and drilling techniques have made the process much more environmentally friendly, but other critics would rather push alternative fuel usage."

Certainly the escalation of oil prices did not halt after Saudi Arabia said it is increasing its oil production a "sufficient" 300,000 b/d to 9.45 million b/d in June in response to customers' requests. That's largely because demand is still growing in China, which reported an eight-fold year-over-year increase in April diesel imports. In the wake of the recent severe earthquake, China's demand for diesel for electricity generation has escalated sharply, boosting energy prices and causing a global shortage.

Market factors
Disagreements over the cause of the energy price spikes continue. Former oilman T. Boone Pickens—now chairman of BP Capital LLC in Dallas—predicted crude futures will hit $150/bbl this year because producers are running out of oil. (Goldman Sachs Group Inc. earlier said crude costs could escalate to $150-200/bbl within 2 years. Such predictions are "more like bull's-eyes than forecasts," giving the "herd" of traders new targets to aim for, said analysts with Pritchard Capital Partners LLC, New Orleans).

In a televised interview, Jeroen van der Veer Royal, chief executive of Royal Dutch Shell PLC, said market perceptions rather than short supplies are pushing prices. "There are no tankers waiting in the Middle East, there are no cars waiting at gasoline stations because they are out of stock. This has to do with psychology in the markets, and you cannot forecast psychology," he said. US Treasury Secretary Henry Paulson blamed both tight supplies and growing global demand, rather than market speculators.

The International Energy Agency is attempting an independent assessment of the world's 400 largest oil fields by November. But it's already indicating crude supplies may be tighter than currently expected, especially in coming years. The Paris-based agency sees a likely shortfall of 12.5 million b/d between capacity additions and incremental demand by 2015.

Meanwhile, there are growing signs that high oil prices are affecting the US economy. Ford Motor Co. said it likely will not return to profitability in 2009 with the sharp drop in sales gas-guzzling pickup trucks and sport utility vehicles. The US Federal Highway Administration reported traffic volume on all US roads and streets in February, the latest available figures, was at the lowest level since 2004.

(Online May 27, 2008; author's e-mail: samf@ogjonline.com)

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