Just when you thought it was
safe to go in the water, the sharks have returned. The price
of oil jumped to $44 a barrel due to terrorist concerns and
Russia – yes Russia. We all are aware and concerned
about possible disruptions in oil production due to terrorist
attacks, and now we have to deal with political uncertainties
in Russia. President Putin seems to be backsliding into his
former days as a member of the KBG. There are subtle indications
that the oil industry could be nationalized.
In the 1980s, the Soviet Union was the world’s largest
producer of crude oil – yes, even larger than Saudi
Arabia. Russia is now the second largest exporter of oil after
Saudi Arabia. Energy revenues account for 20% of Russia’s
economy (according to the World Bank). For all intents and
purposes, Russia is an oil state.
According to Forbes (Russian edition), there are thirty-three
billionaires living in Moscow vs. thirty-one living in New
York. One of Moscow Billionaires, Mikhail Khodorkovsky, now
to be referred to as MK, is in jail charged with fraud and
tax evasion. His company, Yukos, the largest oil producer
in Russia, will probably be taken over by the government.
MK dared to oppose Putin in the last election, and Putin has
decided to punish MK by making an example of him. Other billionaires
who have publicly opposed Yeltsin have been stripped of their
assets and are now in exile. The other Russian oil baron,
Vagit Alekperov, chose to support Putin and is allowed to
keep control of his company, Lukoil. Lukoil controls almost
as much oil as Exxon Mobil. Exxon Mobil and other oil companies
may now be reluctant to invest more money in Russian oil production.
Throw in the recent banking problems and the entire investment
climate in Russia is in question. This in turn will continue
to cause volatility in the price of oil.
OPEC has apparently lost the ability to hold down prices due
to demand and the fact that they are running at 99% of capacity.
In the 1980s, OPEC members embarked on a huge buildup in production
facilities that resulted in 18% excess capacity which in turn
resulted in $10 a barrel for oil. OPEC officials concede they
need a 4% capacity cushion to be able to bring prices back
down to realistic levels ($35 a barrel). Some sources estimate
it will take two years to achieve this excess capacity. Saudi
Arabia, however, believes they can add 650,000 barrels of
oil per day immediately and are starting up two new production
facilities that can add another 800,000 barrels per day. In
addition, non OPEC oil producing countries (Russia, Chad,
Angola) estimate they can now add another 1.2 million barrels
per day. OPEC is extremely concerned that high oil prices
could trigger a worldwide recession that would collapse oil
prices and cause their own economic problems. Energy price
strikes have either triggered or contributed to every economic
slow down since the 1970s.
Another major factor influencing the price of gasoline is
the lack of refinery capacity. Oil refineries in the US are
now running at 96% capacity, and there are 53% fewer of them
than twenty-three years ago according to Raymond James &
Associates, Inc., the Houston energy resource team. There
have been no new refineries built in the US since 1976. This
trend is unlikely to change as environmental regulations can
tie up approval of a new refinery for years. Add to this a
cost of $2 billion to $3 billion to build a refinery, and
the fact that returns on investment are slim (typically 5
– 5.5%), and the outlook is bleak for lower prices at
the pump.
The good news is that based on an inflation adjusted basis,
prices are still comparable to the early 1980s. Also, new
technological developments will increase the efficiency of
existing refiners. Higher oil prices will also force increased
research and development of alternative sources of energy.
Random thought for August 2004:
In Los Angeles, there are fewer people than there are automobiles.
A possible solution to the gas shortage?
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