Pumped Up: Market Speculation Underpins Retail Gas Prices Increases

www.leesburg2day.com Teresa Brumback

Mar 13, 2003 -- As consumers are reeling from gas prices surging to an average $1.63 a gallon on the East Coast, several big oil companies are raking in healthy profits while a possible U.S-led war on Iraq looms.

Prospects about a war in the Persian Gulf region and its spillover effect on oil supplies and prices is creating havoc in the commodities market, experts say.

The U.S. Department of Energy is forecasting retail prices to peak in April at $1.76 a gallon because of the gyrating oil markets, increases in crude oil and normal seasonal upturn in demand in gasoline markets.

Oil experts and suppliers say the prospects of war and other factors—but not supply and demand issues as many believe—has made commodities markets skittish, driving up the crude oil prices which closed at $37.78 a barrel last Friday, twice what it cost this time last year and some $12 more than it cost in November. The cost of gasoline—along with diesel, heating oil and other petroleum products—has gone up primarily because refiners are paying more for crude oil, the principal cost component of a gallon of gasoline, according to the Department of Energy’s Energy Information Administration.

The rising prices are playing havoc with commuters and businesses, but the world’s large oil companies aren’t complaining. Exxon Mobil Corp., for example, last year posted quarterly profits in excess of $20 billion. Royal Dutch Petroleum Company, parent of Shell oil saw net proceeds increase 33% to $107.66 billion last year.

But American Petroleum Institute spokesman Ronald J. Planting cautioned that profit margins are misleading because a lot of the oil giants’ profits gains are generally below last year’s levels. The API sides with DOE’s explanation for the rise in oil prices.

“The most significant factor in the rise in gas prices is the rise in prices on the crude oil market,” said DOE’s Energy Information Administration spokesman John Cogan. Those are influenced by OPEC instituted production cutbacks, uncertainty in the commodities market, and a strike on Venezuela in December.”

As of 2002, Venezuela ranked fourth in countries supplying oil to the United States and Iraq ranked seventh. Iraq accounted for 3.3 percent of the United States’ total imports of oil, according to the API. In ranking order from highest to lowest, the top 10 exporters of oil to the United States for last year were Canada, Mexico, Saudi Arabia, Venezuela, Nigeria, United Kingdom, Iraq, Norway, Angola and Algeria.

During the first seven months of 2002, the United States imported an average of 566,000 barrels per day from Iraq, the world’s second largest proven reserves of oil with 112 billion barrels. Iraq also contains 110 trillion cubic feet of natural gas.

On the worldwide market, February crude oil prices moved higher than expected pushed by fears of the war, low inventories, slow recovery in Venezuelan exports, continued cold weather and sharply higher natural gas prices in the United States, according to the EIA.

But Virginia Attorney General Jerry Kilgore is among those who are not swayed that those factors are chiefly responsible for what area oil dealers say are record prices at the pumps. In Loudoun, a random survey Monday showed that at Plaza Texaco in Leesburg, prices for a gallon of regular gas were $1.66, $1.65 at Jock’s Exxon and $1.74 at Middleburg Exxon.

As part of its consumer mission, the Attorney General’s Office will conduct an inquiry by a special task force this month into whether oil-price gouging is behind skyrocketing prices statewide.

“The task force will be talking to retailers, wholesalers, and refiners, to get to the bottom of the question,” said Kilgore’s spokesman Timothy M. Murtaugh. “Clearly, the price of a gallon of gas is rising. What we want to find out is whether it’s due strictly to market forces or whether it’s being artificially raised.”

The probe was launched following inquiries about possible gouging from gas manufacturers, he said.

William B. Holtzman, owner of Holtzman Oil Corp., an oil distributor for 31 years supplying 100 stations in Virginia, West Virginia and Maryland, said he believes, as many experts do, that the wild swings in the commodities market are to blame for the rising prices. “When you have uncertainties with Iraq, the speculators who want to make money on crude play in the commodities market. That just wreaks havoc with the prices. It’s not supply and demand. I don’t believe there’s any supply problem. The commodities market sets the price.

“It just drives us crazy,” Holtzman added of the price hikes. “Friday we have some increases by 5 cents in heating oil and gas from the suppliers.”

Prices for heating oil from Holtzman Oil have climbed from $1.39 a gallon in December to $1.42 in January, to $1.79 currently. “It’s really spiked because of the commodities market,” he said. “Everybody thought we’d be at war today. The speculators thought so, so they were probably buying it up.”

Last winter, fuel oil was unusually low at under $1 per gallon, because of an unseasonably warm winter and a glut of the product.

Crude oil could shoot up to $50 a gallon if the United States goes to war, Holtzman predicted. “It got to $40 a barrel during the energy crisis. During the Gulf War, the major companies locked their prices for seven days. I thought that was very patriotic. It kept speculators from escalating the price. They could do that now if they could control the crude,” he added.

A lot of oil companies also own the crude oil, he said. “When they go up, they also make money.”

He predicted that if the war pans out, gas prices at the pumps will drop to the $1.20 range.

But market forces are responsible, said Holtzman, not artificial inflations of prices. “When you have talk about gouging, that’s a political thing that someone wants to make hay out of,” Holtzman said.

In the Washington area, gas prices are 10 cents higher per gallon than in Clarke County and other outlaying counties to the west because of a gas tax in Loudoun County and a special metro tax applied because of vehicle-caused air pollution in the Washington area.

James L. Pumphrey, owner of Jock’s Exxon, a family-owned business in Leesburg since 1965, said prices at the pumps are the highest he’s ever seen. “The oil companies react to the way the stock market goes. The slightest word sends the future markets going one way or the other. We have to pass the costs on.”

From what he’s seen, Pumphrey said people aren’t changing their driving habits because of the gas prices. “I think people are still out there doing pretty much what they want to do. With the volume of traffic I see out there, it hasn’t.”

But Pumphrey and others worry about the effect on gas supplies and prices if Iraq’s leader Saddam Hussein sets fire to the oil fields as he did in Kuwait after the Gulf War. If that happens, Pumphrey predicted that would be followed by an initial spike in prices. “Here lately, the least little thing has caused the market to spike, even after comments that Colin Powell made to the UN,” he said of the U.S. Secretary of State.

Loudoun County Public Schools had already braced itself for the gas price hikes. “It hasn’t affected us much. When we started the year we projected more than what we needed, so we’re OK,” said school system spokesman Wayde Byard. “If it shoots up to over $2, we’ll have a problem.”

This year the school system budgeted an average of $1.50 a gallon for diesel and gas. “The 12 snow days helped because buses weren’t on the road,” he said.

For heating oil, the school system is projecting to spend $1.2 million, under the $1.4 million it has allocated.

Loudoun County had already prepared for a worst-case scenario with gas prices. “It’s not a killer thing for us, not like the buses are for the schools,” said County Budget Chief Ben Mays.

For FY 2003, the county budgeted $2 a gallon, but is spending $1.45 for gas and $1.54 for diesel for its 900 vehicles including deputy cruisers, vehicles for fire and rescue, building inspectors and utility, maintenance, and parks and recreation personnel.

Budget figures on total expenditures for fuel were unavailable at press time.

“We are proposing the same $2 a gallon budget in FY 2004, in consideration of the fluctuating prices,” said Jay M. Snyder, director of General Services. No operations have had to be curtailed because of the price hikes, he said, adding, “We’re within the budget.”

Leesburg is also banking on prices being higher than last year. Last year the town budgeted $110,000 for diesel and gasoline, and for next year has budgeted $125,000, said Philip L. Rodenberg, deputy town manager.

"We’re spending more,” said Rodenberg, particularly with the recent snow blizzard and trucks working around the clock.

Gas and diesel are needed by the town’s police, street and utility crews.

Effects of price hikes are simmering at the state level as well. Virginia State Police are projecting to spend $2.7 million for gas, compared to last year’s expenditure of $2.5 million.

“We have not sent out any instructions to troopers on fuel savings measures,” said police spokesman Lt. Gary B. Payne. “We do constantly send out reminders to drive in a manner to save fuel.”

During previous gas crises, State Police were required to park patrol cars for 10 minutes each hour. “Our normal patrol would be to constantly patrol the interstate, monitor for traffic hazards and disabled motorists,” Payne said.

Over the past three months police have spent an extra 25 to 30 cents per gallon on gas, while using over 200,000 gallons a month, according to State Police Property and Finance Officer Douglas W. Dix. “We’re having to make up the extra money from other areas,” he said.

As oil prices are rising, supplies are down. Total world inventories by oil-exporting countries reached an estimated 2.4 million barrels at the end of February—the lowest level since March 2000, according to the Energy Information Administration.

Prices are likely to remain on the high side and subject to substantial volatility through 2003, the agency stated. The continued loss of much of Venezuela’s oil exports and the risk of increased tensions in the Middle East could cause oil prices to spike. A strike against the oil sector in Venezuela continues and the recovery in production and exports of crude and oil products has been slow.

If the oil strike is prolonged and tensions in the Middle East continue, the chance of another price spike will remain high, it added.

Experts point to historical trends for price hikes. Prices also were volatile during the Persian Gulf crisis. When the U.S.-led air war began, the United States released supplies from its strategic petroleum reserve and prices fell.

Today, the United States has 600 million barrels in storage in the reserve, equivalent to 300 days of imports from the Middle East. The United States uses 20 million barrels a day, according to Planting.

But it is unlikely the United States would have to depend heavily on its strategic petroleum reserve due to supplies worldwide including strategic stocks available in Europe and Asia, the API spokesman said.

For the week of March 3, gas prices in the United States averaged $1.69 at the pumps, compared to the average of $1.14 a gallon in 2002, according to the Energy Information Administration.

The East Coast average for the week of March 3 was $1.63, compared to $1.10 last year at this time.

Nationally, last week the lowest prices were reported at an average of $1.58 on the Gulf Coast. The highest average was at $1.93 on the West Coast.

Cogan couched predictions about future increases, pointing to a vast climate of economic and political uncertainty worldwide.