Tue, Jul 22, 2003 - Page 9 News List

When the US gets cold, the world pays more for oil

Americans' voracious appetite for fuel, coupled with the decade-long shrinking of the US energy industry, is putting massive demands on an already stretched supply system

By Timothy Gardner  /  REUTERS , NEW YORK

ILLUSTRATION: MOUNTAIN PEOPLE

Last January, the cold was so bitter north of the New York Harbor oil hub that icebreakers in the Hudson river had to smash free a heating oil barge. Consequently, dozens of fuel shipments to New England were delayed.

Energy analysts dubbed the winter "The Perfect Storm".

The cold, combined with the build-up to war in Iraq and a general strike in Venezuela, a major supplier of crude to the US, pushed oil to within one cent of a 12-year high of US$40 per barrel and drove US heating oil futures to record levels.

It also did far more than that. So voracious is the US appetite for energy -- the country uses a quarter of the world's oil and depends on imports for 60 percent of its fuel -- that soaring costs in America rippled around the world, pushing up oil prices and damaging the economies of other nations.

The government of Ghana was forced to raise gasoline and diesel costs by an average of 90 percent -- an action that helped raise inflation in the spring by nearly 30 percent. In South Korea, which imports all of its oil, the government slashed import taxes on petroleum by 50 percent and switched off some public lighting.

Behind the shortage in the US and its knock-on effect on prices worldwide lies a decade-long shrinking of the US energy industry, where costs have been cut to improve profit margins. In addition, oil and natural gas drillers are pumping less from the US mainland, and refiners that could no longer make profits closed plants and drained storage tanks. The result is a system that is increasingly exposed to interruptions in supply.

Perhaps, analysts say, if the US had been more prepared to provide fuel to its own consumers -- instead of relying so much on imports -- the shock waves from this year's US heating oil crisis would have been much smaller.

"The oil industry has been generally under-invested in the last 20 years ... If we get into a situation where we get a hiccup in the oil balance you get these very leveraged effects on price," says Mike Rothman, an analyst at Merrill Lynch in New York.

Poor profits,

cost-cutting

Plagued by relatively poor profits for much of the 1990s, US energy companies reacted by cutting costs. Oil companies in the US keep about 1 billion barrels of spare crude and oil products like gasoline on hand, worth tens of billions of dollars.

But when oil prices drop, the cost to refiners can be overwhelming, as inventory loses value. US oil refiners whittled down the stock cushion they kept on hand by managing the risk from inventories more efficiently using computer software.

"The US has probably been the most active [nation] in terms of moving toward a lower average level of inventories for petroleum," says Dave Costello, economist at the federal Energy Information Administration.

The shift gained pace during the Internet stock boom as oil companies' shares suffered in comparison with the dotcom high-fliers.

"If refiners wanted to maintain share price in an environment of high-tech stocks they had to do everything to cut costs," says Sarah Emerson, director of Boston-based Energy Security Analysis.

Demand for oil and oil products in the US is huge. The US economy burns up 26 percent of the 76 million barrels per day (bpd) of world oil supply, yet the country's oil production has been declining since the Arab embargo of 1973 -- down from 9.3 million bpd then to about 5.7 million bpd this year. Yet in those 30 years, demand has jumped from 17 million bpd to 20 million bpd.

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