Wednesday, April 26, 2006

Why Gas Prices Won't Go Down, from today's LA Times

With an administration that lives by greed, we are becoming a third world nation.


Why Gas Prices Won't Go Down
By Elizabeth Douglass, Times Staff WriterApril 26, 2006
The steps proposed by President Bush on Tuesday to rein in soaring gasoline prices would do little to cut fuel costs for outraged motorists before the summer driving season, industry experts said.That's because the factors driving today's record gasoline prices are varied and complex — and beyond the reach of presidential dictate. They include a shortage of refining capacity, rampant speculation in oil markets, oil company choices about fuel additives, unrelenting gasoline demand and high industry profits.

Even so, U.S. commodities traders seemed to give the president credit for the effort.Prices on oil and gasoline markets fell after Bush halted government oil purchases for the strategic petroleum reserve and urged the Environmental Protection Agency to consider relaxing clean-fuel rules if gasoline supply problems emerge. The moves were aimed at keeping more oil on the open market and making it easier for refiners to deliver fuel where it is most needed."It took oil prices down, it took oil stocks down and it calmed the market," said Fadel Gheit, an oil industry analyst at Oppenheimer & Co. in New York. But the proposals, he added, "aren't really going to do anything. It's good TV and gives the appearance of being in touch."That appearance, already important in an election year, will be more so this week, as oil companies including giant Exxon Mobil Corp. and Chevron Corp. announce first-quarter profits that are expected to top previous records that generated anger at the pump and in Congress."They are going to be record, blockbuster, huge, given the fact of where these commodity prices are going," said John Kilduff, a senior vice president at commodities firm Fimat USA Inc. in New York.Exxon Mobil took in about $1 billion a day in revenue in the last six months of 2005, which translated into profit of about $10 billion for each quarter.The president's actions will do little to damp the oil prices that are behind the profits.Industry experts point out, for example, that Bush's pledge to stop taking oil off the market to help fill the oil reserve is a move that would ease prices if there were a short-term supply crunch. Right now, however, the United States has plenty of oil."Crude oil supplies are at an almost eight-year high," Kilduff said. "The price is obviously not reflecting that. It's reflecting the worries about the future."Oil passed the $75-a-barrel mark last week, largely because of concerns that geopolitical tensions over Iran's nuclear program could interrupt shipments from that country, the world's No. 2 exporter. Traders operating in a continuous state of what they call "petronoia" are worried as well about political turmoil affecting key suppliers such as Nigeria, Chad and Venezuela.On Tuesday, oil for June delivery fell 45 cents to $72.88 a barrel in New York. After dipping as low as $2.07 a gallon after Bush's remarks, gasoline rebounded to finish the day down 4.48 cents to $2.129 on wholesale markets.The high cost of oil, often passed quickly from the futures markets to daily crude purchases, is responsible for about half the price at the pump, experts say. But other factors also are pushing up current retail prices, which in California on Monday hit a record average of $3.068 for a gallon of self-serve regular, according to the federal Energy Information Administration.Adjusted for inflation, the price of gasoline is just below its all-time high set in the early 1980s.U.S. gasoline stockpiles have been drained in recent months because of lower output at domestic refineries — some still suffering from hurricane damage along the Gulf Coast and others undergoing longer-than-normal spring maintenance.Gasoline traders also fretted that there could be supply glitches as some refiners switched to adding ethanol to summertime fuel instead of MTBE, or methyl tertiary butyl ether — an additive known to contaminate groundwater. A government agency recently warned that such disruptions could increase price volatility and cause brief gasoline shortages.Prompted by those worries, Bush ordered the EPA to be ready to grant clean-fuel waivers to counter any ill effects of the switch-over. That move also was viewed Tuesday as providing only limited relief, because many refiners are unlikely to change course by seeking a waiver just as the ethanol transition is nearing completion.The nation's refiners "are pretty much committed regardless," said John Felmy, chief economist at the American Petroleum Institute, a trade group in Washington. "The switch pretty much is going to be done by May 1, and that's Monday."Analysts also said U.S. gasoline supplies should soon swell because more refineries have returned to full fuel production and tanker loads of imports are on the way. Barring new troubles, they said, retail prices should start falling on their own before Memorial Day.Looking ahead, though, experts see a continuing struggle to keep up with steadily growing demand for oil as well as for gasoline, diesel and other fuels.Rising fuel demand in the U.S., boosted largely by economic growth, has for years outpaced production from domestic refineries — making the market more susceptible to the availability and price of imported supplies. The same is true for oil.The situation is made worse by the meteoric growth in oil and fuel consumption in the hot economies of India and China. Soaring demand there is straining the ever-precarious worldwide oil balance as well as creating stiff competition for imports.Such deeply rooted problems are not easily or quickly solved, said Daniel Yergin, chairman of Cambridge Energy Research Associates, an industry research firm in Massachusetts."Every president who has problems with energy learns that there is not a lot you can do in the short term," said Yergin, author of "The Prize," a Pulitzer Prize-winning book on the oil industry. "The system is overstressed … and the truth is most of the [solutions] are medium-term or long-term."What counts in the short term is demand, he said, noting that prices retreated when consumption dropped amid the price surge that followed last year's hurricanes. For immediate effects, Yergin said, "it's really not what the administration does — what really matters is what consumers do."

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