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World: When It Comes To Energy Markets, It's A Small World After All

  • Julie Corwin --> Last week, the governor of the Siberian region of Kemerovo Oblast found he was singing the same tune as governors in the United States. He accused oil companies of robbing people at the gasoline pumps with arbitrary price increases. In Tennessee, a few days earlier, Governor Phil Bredesen called out the state's commerce inspectors to look for price gouging at the pumps, and Georgia Governor Sonny Purdue issued an executive order prohibiting price gouging for motor fuels.

But oil experts say what's going on at gas pumps the world over is not gouging. Both the market for gasoline and crude oil were already operating on a razor's edge of tight supplies and rising demand before Hurricane Katrina took out 10 percent of U.S. refining capacity and about 30 percent of its oil production. In global terms, this is not a huge amount, but in a tight market any blow to supply is magnified and becomes a supply shock.

Because these markets are global, the ripple effects of Hurricane Katrina will be felt at gasoline pumps all over the world -- from San Diego to Moscow to Astana.

"We've had over the last few years not a supply shock but a demand shock," Tom Wallin, president of Energy Intelligence, explained to RFE/RL. "Demand has grown in China and the U.S. and other markets, and it has used up all the spare capacity in the global supply system.... There is very little extra refining capacity worldwide, very little extra oil-production capacity except in Saudi Arabia but it's mostly sour crude and not very useable. And there's not much slack in terms of transportation, tankers, etc. So the whole system [was] tightened up because of this demand growth. But now we've got a supply shock on top of the demand shock. Basically, the system is vulnerable. It can't take it, so the prices go up."

Spare Capacity Going Unused

Russia and Kazakhstan are one of the few areas in the world where spare refining capacity exists, but in the case of Russia, its refineries are too outdated. And, in Kazakhstan, the refineries are located too far away from the markets.

"[Russia's] spare refining capacity is nothing to write your mother about. What it is is 'crack' refining capacity. We can run more crude through the refinery but we don't get anything worth anything at the other end: high-sulfur diesel, low-octane gasoline, and lots and lots of residual fuel oil. It doesn't do anybody any good. All of the good refining capacity, the effective refining capacity, is basically utilized," Matthew Sagers, director of energy economics for Eurasia and Eastern Europe at Cambridge Energy Research Associates, told RFE/RL.

Kazakhstan's most sophisticated refinery, located in Pavlodar, runs at a faction of its capacity, because it's located so close to Russia's most sophisticated refinery at Omsk, according to Sagers. Kazakhstan is in the process of upgrading its most outdated refinery in Atyrau, but the country is not in a geographic position to impact overall world supply.

Insatiable American Appetite

In terms of the world markets for gasoline and crude oil, events in the United States are more crucial. Two critical questions are how long it will take to get affected refineries up and running again and how much U.S. consumers will be able to curb their seemingly insatiable demand for gasoline. According to Wallin, there's no firm timetable yet for fixing the refineries taken out by Katrina, since the extent of the damage in some cases remains unknown. At least two refineries look like they will be down for what could likely be months.

On the demand side, U.S. consumers are to a great extent locked in by their choice of automobiles and lifestyle. "It's not really discretionary. It's people driving to work, shopping, and going to things," Wallin said. "It's because they chose to live in suburbs and don't have alternatives in terms of public transportation in most places. It's the types of cars people choose to drive and the small trucks. You can't change that overnight. Basically you're stuck. The automobile fleet takes 10 years to turn over. You're in this pattern that it's really hard to change. At the margins, people won't go on long driving vacations."

Sagers also envisions only small, incremental changes in the U.S. lifestyle. "Families like mine are pretty typical," he said. "We have three or four cars. You don't drive the Excursion [a large sport-utility vehicle] unless you've got a whole passel of people that you're going to haul. You drive the smaller car. So there is a lot of things people can do behavior-wise to cut gasoline consumption. That doesn't mean car pooling, but fewer trips to the grocery store. You drive car A instead of car B."

Of course, an economic recession, particularly a deep one, could finally curb U.S. energy demand, as well as world demand. Likewise, another storm or natural disaster could tighten up supply even further.

"Certain markets like gasoline where stocks are low, heating oil going into winter, natural gas going into the winter, jet fuel going into the winter -- those markets are going to be real vulnerable," Wallin said. "So if we get another storm another accident, another problem, we will be really in the soup."

In the meantime, as gasoline prices remain high, Sagers predicts that Russian oil companies can expect similar pressure and scrutiny from the public that U.S. oil firms are encountering. With one of their colleagues, former Yukos CEO Mikhail Khodorkovskii already behind bars, Russian oil executives know that they must tread carefully.