Oil Price Not as Simple as Demand and Supply 

(MENAFN - Arab News) Syed Rashid Husain

Crude market prices are continuing to seesaw — rather heavily. From a price approaching $70 a barrel last week, it is currently hovering at around $65. Who is controlling the oil market prices and who is pushing it?

Oil producers continue underlining that the market fundamentals are balanced. There is no dearth of supplies. It's the non-fundamentals that are calling the shots, they insist. While addressing the press conference last weekend at the conclusion of the Asian energy ministers forum, Saudi Petroleum and Mineral Resources Minister Ali Al-Naimi said that extra market forces — from geopolitics to hurricanes and refining constraints — all are impacting the oil markets.

However, an interesting debate seems to be raging on the issue. Factors other than mere output are increasingly getting into play in the overall energy equation. Some are openly questioning the refiners' ability. OPEC has been underlining the refining bottleneck in the overall supply chain.

Consumer groups in the United States, the world's largest consumer of oil, have raised concerns about the practices of the markets. Fingers are being pointed to refinery closings and company mergers that have cut in half the number of refineries in the US over the past 25 years.

A California consumer group, the Foundation for Taxpayer and Consumer Rights, has dug up a number of old memos from major oil companies discussing quite frankly the need to cut refining capacity in order to boost profit margins.

As existing refineries in North America are getting older, the numbers of unexpected shutdowns are also going up, like those caused by fires at two different Imperial Oil refineries in Ontario this winter.

Likewise in the US, where the last new refinery was built 31 years ago, surviving refineries need to operate at full tilt in order to come close to meeting demand, but seem less and less able to do so.

Ten years ago, refineries in the US typically operated at about 95 percent of capacity, but in recent years, this number has fallen steadily, to average just over 89 percent last year, Bart Melek, a commodities specialist with BMO Capital Markets, noted.

Amid a string of breakdowns over the past several weeks, refinery output fell to 87.8 percent of capacity last week and then edged up to 88.3 percent the subsequent week, according to the US government figures, leaving gasoline inventories badly depleted just as motorists begin the highest-demand, during the summer driving period. This had visible impact on the crude market psyche.

With refinery output declining, a rough indication points to higher refinery profitability. A measure of the spread between the price of crude and the price of refined products has nearly tripled, from an average of just $3.56 in 1999 to $10.94 last year. Amid the recent shortages, this so-called "crack spread" shot as high as $24.80, Bart Melek said. He forecast in a recent report that "we (could) look for sky high crack spreads throughout the summer."

In most businesses, if one company failed to serve the market, its many competitors would rush in, taking away customers. But when there are very few companies serving the market — and it's a long, costly process to build a new refinery — oil companies can be pretty sure that no competitor will rush in.

With no fear that demand will slump if prices rise, there exists a perfect prescription for an industry to enjoy the rising profits without any need to build costly new refineries.

Oil industry is too complex. But one thing is certain; oil producers cannot be blamed for all the woes of the common man at the gas station.