31 October 2001
Thinking About Downstream Oil
Glenn Reynolds recently noted the surprisingly (given the turbulence in the Middle East) low gas prices, speculating that we have the Russians and Saudis to thank.
Actually, the most relevant factors are mostly unrelated to the Saudis, who have pushed for slight cuts in OPEC production. Larry Kudlow has suggested the Russians are playing a role, and there is some truth to that, although I think he overstates its importance. Russia's oil policy in recent times has not been closely aligned with OPEC's, the primary reason being that oil and natural gas are two major sources of hard currency export earnings for the nation (and NOT that Russia is overly concerned about doing the United States any favors). And in any case, Russia is not a major direct supplier of the U.S. (i.e. they don't rank in the top ten exporters of crude/crude products to the United States), meaning their decisons have more of an impact on the overall world market and perceptions than U.S. supplies (not that the former is unimportant).
Instead, the U.S. is currently enjoying a decline in gas prices due to more unfortunate circumstances. Foremost, the economic slowdown has lowered American demand for crude significantly, a downturn that prevailed prior to 11 September (according to API, U.S. petroleum imports for August 2001 were down nearly 1 million b/d over August 2000 figures, while domestic production remained roughly the same, indicating significantly lower demand). The repercussions of 11 September have further dampened overall petroleum demand, since jet fuel use has declined significantly since then, freeing some stock for gasoline production. Additionally, the end of the summer driving season has eased very tight refining capacities. And another factor (though some would disagree) is entirely monetary, and that is ongoing deflation (described here by David Malpass, though Larry Kudlow, Steve Forbes, and others have been arguing similarly for roughly two years), which affects commodity prices.
Clearly, expectations also play a role. The futures market currently reflects the view that a fairly limited operation in Afghanistan does not pose much of a threat to world oil supplies. If the action turns to Iraq (the sixth largest supplier of U.S. crude and products imports) or if Saudi Arabia (the second largest supplier of U.S. crude and products imports) becomes destabilized, expect the futures market -- and the price Americans pay at the pump -- to reflect the changed situation.
[Posted @ 10:44 PM CST]
