QUICK ACTION NEEDED ON OIL PRICE MYTH
Oil and gas companies, especially those selling oil products in the US, should pre-empt this myth
Oil and gas companies, especially those selling oil products in the US, should pre-empt this myth:
Prices of gasoline, diesel fuel, and heating oil are slow to follow those of crude oil down but quick to follow them up.
Facts don't support the myth. But people believe the myth anyway.
It would be a shame for companies to take a public relations and regulatory beating in what should be a year of economic recovery.
But it's an election year. The potential for political mischief is extreme.
Companies should address the myth now.
The fact is that crude prices began their recovery from unsustainably low levels in the first quarter of last year. By March of 1999, after two half-steps that didn't work and with support from nonmember exporters, the Organization of Petroleum Exporting Countries was talking about meaningful cuts in production.
Even before the group turned talk into action in a March meeting that took effect Apr. 1, 1999, crude prices were climbing. They rose throughout the year.
Product prices took longer to start rising and didn't keep up. With raw material costs rising and product prices lagging, refiners suffered.
"Despite many positive fundamental factors," says a report by Purvin & Gertz Inc., "1999 was one of the worst years in the past two decades for US refining margins."
Demand increased by 2.3% during the year, the firm notes, but refining capacity increased by 3.1% with the partial restart of an idle refinery.
"In Europe," Purvin & Gertz says, "refining margins fell to their lowest levels since 1985." And in Asia, "the past year was the worst in recent history for refining profitability."
Low margins encourage refiners to cut their plant operations and fill demand, to the extent possible, from inventories. That's what happened last year, when inventories of crude also were falling. The trends could not last for the simple reason that storage has limits.
This year refiners must meet demand from plant operations and, to the extent possible, rebuild inventories. That means relative scarcity of immediately available supply-shortage, in other words.
And shortage means prices rise, as they must if the market is to right itself after a wild cycle that began with the Asian economic collapse in the middle of 1997.
This should surprise no one. The US Energy Information Administration issued the appropriate warning in its March Short-Term Energy Outlook.
"US average monthly retail motor gasoline prices are likely to reach all-time highs, in nominal terms, this month and continue to climb through the spring," it said.
But consumers notice retail prices mainly when they're climbing. They'll hear about an OPEC production increase and learn that crude prices are falling. When product prices don't immediately fall, they'll suspect they're getting gouged, and opportunistic politicians will happily press the crusade against oil companies.
They'll all conveniently forget, or deliberately ignore, the difficulties refiners around the world endured last year, when product prices didn't rise in step with crude prices.
Unless oil companies aggressively remind them, beginning right now.