As we (and others) have argued [1], one of the aims of Operation Iraqi Freedom was likely to jack up the price of oil, giving a salutary boost to industry expansion plans, facilitating Western corporate colonization of the Caspian Basin (beating the Russians to the punch) as well as the opening of the purely ancillary ANWR. But here is a sure sign that things are getting out of control, even from Bush's hubristic perspective. If the price of oil breaks $100/barrel, it could threaten already-waning public enthusiasm for the Republicans and their wars. Bush had to open the Strategic Reserves after Katrina; analysts may now "welcome" his decision to stop pumping into them to free up more oil for the market and ease prices, but it strikes us a reckless gamble--which could backfire with the next escalation in the Middle East (say, US military action against Iran...) From the New York Times [2], April 25:
Analysts Welcome Move to Freeze Deposits to Reserves
By JAD MOUAWADWhile President Bush's decision to temporarily freeze deposits into the strategic reserves does not involve large volumes of oil, it was welcomed by analysts given the current tightness in global oil supplies.
"It's an important shot across the bow of oil markets because it signals the administration is willing to intervene in the market," said Jan Stuart, an economist with UBS in New York. "The volumes are small but $75 a barrel seems to have triggered a sensitive point."
In May, the Department of Energy had planned to add 2.1 million barrels to the stockpiles, or an average of 73,000 barrels a day. By contrast, the United States consumes over 600 million barrels in a month, or some 20 million barrels a day.
The reserves currently hold 687.5 million barrels of crude oil in salt caverns along the Gulf Coast. The administration has been extremely reluctant to use the reserves to push down oil prices, repeating instead that they were only intended for use in an emergency.
After Hurricane Katrina, the administration authorized the sale of oil from the reserves to make up for disruptions in production from the Gulf of Mexico.
Crude oil futures for June delivery fell 45 cents, or 0.6 percent, to settle at $72.88 a barrel today. Last week, crude oil reached a record of $75.17 a barrel. The price is nearly $5 a barrel higher than it was after last year's storms.
The high price of crude oil has pushed gasoline prices to a national average of $2.92 a gallon, according to AAA, 70 cents higher than the same time last year.
But many parts of the country, especially in the northeast, have been experiencing much higher gasoline — even shortages in some rare cases — as refiners are scrambling to switch to an ethanol-blended gasoline instead of using MTBE. Refiners have decided to drop MTBE, a popular oxygen additive for the industry, but which has been blamed for water pollution.
The rapid shift has created vast logistical challenges for refiners and distributors, mainly because of ethanol shortages and the difficulties linked to transporting it. At the same time, refiners are also in completing their seasonal maintenance during which they switch production from winter-grade to summer-grade gasoline.
The decision to let the Environmental Protection Agency waive environmental restrictions on gasoline supplies could encourage a smoother transition this summer by allowing imports of lower grade gasoline from Europe and helping refiners produce larger quantities of lower-quality gasoline to meet demand this summer.
"While they want to prevent pollution but they also want to prevent chaos," said Deborah White, an analyst at Société Générale in Paris.
Daniel Yergin, chairman of Cambridge Energy Research Associates, said the administration was trying to ease the current supply crunch by introducing more flexibility into the market. Some of the measures announced by the president are similar to the emergency steps taken by the administration after last year's hurricane season.
"The big problem right now is supplies, not demand," Mr. Yergin said. "Last year's experience shows that increasing flexibility on the market can help reduce price pressure and help reduce shortfalls."
See our last post on the global struggle for control of oil [3].
