Feature: 'war premium' fuels price hikes
www.upi.com By Hil Anderson UPI Chief Energy Correspondent From the Business & Economics Desk Published 2/18/2003 8:51 AM
LOS ANGELES, Feb. 18 (UPI) -- The impact that the anticipated clash between the United States and Iraq will have on gasoline prices remains largely within the realm of speculation.
For a war that is supposedly about oil, or the liberation of the Iraqi people, depending on your politics, there has been a great deal of uncertainty over how the oil-dependent world will cope with the potential chaos in the Persian Gulf.
Analyses of the situation have boiled down to equally dire predictions of either crude topping $50 per barrel and gasoline surging to nearly $5 per gallon at the pump in the event of a prolonged conflict, or an utter price collapse brought on by the quick "liberation" of Iraq's oilfields and the removal of United Nations' export restrictions shortly thereafter.
"Oil traders have been concerned for months that a war in Iraq...could result in Iraqi oil being removed from world markets and could affect production elsewhere in the Persian Gulf," the U.S. Energy Information Administration concluded in its latest energy outlook. "There have been no shots fired as yet, but the war of rhetoric has produced regular spikes in oil prices."
Gasoline prices at the pump were in a sharp climb by last week's end, reaching levels that the EIA and AAA pegged at some 50 cents over the same period a year ago, and around 20 cents over the price just last month.
The situation has stirred up plenty of worry and ire among consumers who have been grumbling around the office water cooler and filling Internet chat rooms with suspicions about gouging, but few solutions.
June Enmark summed it up last week, while topping off her van at a gas station outside San Diego.
"What can I do?" Enmark asked The San Diego Union-Tribune. "I need gas to get to work."
One woman, who asked to not be identified, told United Press International she got sick every time she drove by a gas station.
"I see the prices rising and I feel helpless," she said, standing next to a behemoth silver SUV. "I have to drive my car; this is Los Angeles where you are what you drive."
Consumer groups and government officials have issued warnings to the oil industry not to mistake the Persian Gulf crisis for a green light allowing large-scale price hikes.
"We have heard complaints of gasoline selling in Texas for well over $2 per gallon," Texas Gov. Rick Perry declared last Friday. "The vast majority of Texas companies conduct their businesses legally and ethically; however complaints received in our offices will be investigated by the attorney general, and I stand firm...in warning companies against trying to exploit consumers."
Trying to get a firm handle on rising energy prices in the past has been a frustrating exercise due to the complex and fluid nature of the oil market. Variables such as weather, refinery maintenance schedules and the overall economy can have an impact on the retail price of gasoline as significant as labor trouble in Venezuela and the anticipated last stand of Saddam Hussein.
In addition, wholesale prices on the petroleum spot market are established daily in an auction-like atmosphere that is volatile, highly susceptible to fears of supply shortages. When such concerns surface, traders working for brokers and oil companies have to pay more to nail down their companies' needs.
Therefore, the price paid at the pump is both difficult to predict and is based on business agendas and not on the foreign or economic policy aims of the United States. As a result, the public is generally left with vague answers that don't do much to ease anxieties about the bullish gasoline market.
The Los Angeles Economic Development Corp. recently predicted that a protracted war could send crude to $55 per barrel as compared to current prices under $37. The rise, of course, would be passed down to consumers.
In addition, environmental regulations require refiners each April to start producing summer-grade reformulated gasoline (RFG) for sale in most major urban areas. Summer RFG keeps emissions in check during hot weather, although it also costs more to produce and reaches the pumps June 1 -- just as vacation season demand kicks in.
Other fuels have been affected as well. A number of airlines have tacked $20 fuel surcharges on to the price of a ticket while Matson Navigation announced higher prices for marine bunker fuels would necessitate adding another 1.5 percent to its surcharge for goods shipped into Hawaii.
OPEC has pledged to keep the oil flowing through the crisis, although there is a risk of war damage to Saudi and Kuwaiti oil facilities, and transportation costs will rise as insurance rates go up for tankers transiting the Gulf.
On the other end of the spectrum is the scenario of a lightning war that ends with Iraq's oilfields captured intact and U.N. limitations on Iraqi exports canceled. The result could be the market suddenly becoming flush with oil and prices crumbling.
Whatever the result of the current crisis, it will likely take the remainder of the year for the market to settle back into a more routine exercise in supply and demand that doesn't include the $3-$4 "war premium" that has been tacked on to the price of each barrel of crude.
And when it comes down to the pocketbook issue of gas prices, eliminating that war premium one way or another is what will bring relief to consumers.
"Our vulnerability is not necessarily found in the volumes of oil we import," Robert Ebel, director of the Center for Strategic and International Studies, told the Senate Energy Committee last week. "Rather, it is the price we pay for the oil we consume, whether secured through imports or from our own oil fields."