Oil prices not all war and strikes
Looming war in Iraq and a Venezuelan workers' strike have stolen the headlines in the build toward $US40 oil, but it is a decade-long shrinkage of the US energy industry that underlies the soaring price.
As energy companies bid to improve profit margins by cutting costs, oil and natural gas drillers are pumping less supply from the US mainland, while unprofitable refiners have closed plants and drained storage tanks, analysts said.
The result: a US energy supply system that finds it increasing vulnerable to supply shocks, leaving fuel consumers at home and abroad more exposed to sudden price rises.
"The oil industry has been generally underinvested in last 20 years ... so what happens is if we get into a situation where we get a hiccup in the oil balance and you get these very leveraged affects on price," said Mike Rothman, analyst at Merrill Lynch bank.
The US supply shortage has undercut the ability of the Opec oil producer cartel -- itself now bumping up against production capacity limits -- to keep oil price rises under control. Opec meets next week to decide policy in the event of war in Iraq.
US oil companies keep on hand about 1 billion barrels of spare supply of crude oil and oil products like gasoline, worth tens of billions of dollars. But when oil prices drop, the cost to refiners can be overwhelming, as inventory on hand loses value.
Plagued by poor profits for much of the 1990s, US oil refiners increasingly used computer software to manage inventories more efficiently and whittle down the stock cushion they keep on hand. The shift gained pace in the Internet boom.
"If refiners wanted to maintain share price in an environment of high tech stocks they're going to do everything to cut costs," said Sarah Emerson, director of Boston-based Energy Security Analysis Inc (ESAI).
Low stocks, high prices
From February 1993 to this year commercial crude inventories have fallen 18% and now stand at the lowest level since 1975, according to government figures. The lack of oil last week pushed crude prices to within a penny of hitting $US40 for the first time in 12 years.
"Throughout the US energy industry, assets and activity have been undervalued by markets," said Paul Horsnell of J.P, Morgan bank.
This winter the slow inventory evaporation has been accelerated by a anti-government Venezuelan strike that has chopped oil exports of the world's former No. 5 supplier by one-third, or 1 million barrels per day (bpd).
UScrude stocks have dropped to the minimum 270 million-barrel level the government says is needed to keep supplies flowing smoothly -- just as the international oil system braces for war in Iraq, which ships around 4% of world crude exports.
The sheer size of the energy needs of the United States -- which consumes a quarter of the world's oil and imports 60 percent of its fuel -- means higher U.S. prices ripple through to Europe and Asia, even though supplies there are not nearly as tight.
"The United States has probably been the most active (nation) in terms of moving toward a lower average level of inventories for petroleum," said Dave Costello economist at the federal Energy Information Administration (EIA).
Winter woes
A long, cold winter has pulled US heating oil stocks to their lowest levels in nearly three years. Gasoline stocks, which should soon be building for summer driving demand, are 11% lower than last year.
Supplies have now fallen to dangerous levels, said Matthew Simmons, oil consultant with Simmons and Co, in Houston. "We got here over a decade, as a result it's going to take long time to figure out how we get out of this hole," said Simmons.
Cost-conscious companies' reluctance to drill for new supplies has also helped press prices for natural gas -- a rival heating and industrial fuel -- to all-time highs for the second time in three winters.
"This is not the sign of a market that is either working well or playing a constructive role in the US economy," said JP Morgan's Horsnell.
And as companies curb spending, US oil reservoirs on the mainland are drying up. From 1990 to 2002 domestic crude production has fallen more than 20% to 5.82 million barrels daily.
"The effort to produce has gone elsewhere, to the former Soviet Union and West Africa as well as Mexico," said the EIA's Costello.
The current structure of oil futures -- in which later months are greatly discounted to current prices as traders bet the prices will fall after a US victory in Iraq -- gives no incentive for companies to start storing more.
"Right now there's no reason at all for any refiner to put anything into a tank." said ESAI's Emerson. "Do you want to buy $37 a barrel crude and sell it at $25 in two or three months?"
Source: Reuters