Related topics: energy, Petrobras, Russia, China, Jim Jubak
Cheap gas tomorrow and cheap gas yesterday, but no cheap gas today.
Turns out there are worse things than $4-a-gallon gasoline.
There's driving up to the pump and discovering there's no gas. That's happening across a big swath of the developing world. And it's happening not just with gasoline; diesel fuel and even electricity are also in short supply.
The reason is simple: Governments from Russia to China to India to Indonesia to Brazil have pressured or required oil refineries (and other energy companies) to keep consumer prices low even though their costs for oil (and coal) are rising. That's turned these companies into red-ink machines. Not surprisingly, they're reacting by cutting production -- that's what you do if you lose money on every sale.
They are also reacting by exporting gasoline to countries that pay market prices for petroleum products. And that has resulted in massive shortages of everything from gasoline to diesel fuel to electricity in countries like Russia.
No gas, less growth
The shortages have become large enough to potentially cut economic growth in the economies that the world increasingly counts on for growth -- just as central banks are raising interest rates there to slow growth in an effort to fight inflation.
Jim Jubak
In fact, I'd argue that despite all the worry on Wall Street about how higher U.S. energy prices will hurt the U.S. economic recovery, the biggest danger to economic growth from higher oil prices is in those developing economies that are now trying to control prices without squashing supply.
Russia, the world's biggest oil producer, is a good example of how a developing economy can get caught between a rock and a hard place by rising energy prices.
At the end of April, gasoline sold for $3.03 a gallon in Moscow. When there was any to sell. Beginning in February, gas stations across Russia started to experience shortages. That's a direct result of investigations launched by Prime Minister Vladimir Putin into steep price increases in gasoline. With the government cracking down on rising prices, effectively capping gasoline at a time when world oil prices had soared, Russian oil producers and refiners had started to ship more gasoline overseas. Prices for gasoline and diesel in Russia in March were $70 to $150 lower per metric ton than on world export markets, according to the Jonathan Muir, the CFO of the TNK-BP joint venture. The company, Muir said, would have earned $54 million more in the first quarter if it had exported the gasoline it instead sold in Russia.
So guess what? Russian refiners started to do just that -- and fuel shortages emerged first in the country's more remote areas, such as Siberia and the southern Altai region, and then in urban areas such as St. Petersburg. In the Altai, more than 700 gas stations have closed. In the Siberian city of Tomsk, gas stations limited customers, even city buses, to 25 liters a day. Because city buses need 80 to 100 liters a day to operate, you won't be surprised if I tell you that 20% of buses didn't run on April 28.
The Russian government (keep in mind that elections for the national legislature are this year and for president are in 2012), has responded to this crisis by slapping a punitive 44% tariff on gasoline exports, effectively prohibiting exports and diverting all gasoline to domestic markets.
It's not yet clear whether that means more gas is reaching Russia's gas stations or if Russia's oil companies are instead changing their refinery mix to produce products other than gasoline that have higher profit margins.
A similar situation in India
In India the scenario is much the same -- with the difference that India's oil-marketing companies are government owned and that India, rather than being the world's largest oil producer, imports 70% of its fuel. Gasoline in India now sells for 40% more than it did in February 2010, but the price increase would be even higher if the Indian government and the state-owned marketing companies didn't subsidize the price of fuel. The government's budget for fuel subsidies for the fiscal year that ends in March 2012 is about $5.5 billion. At recent prices, the actual bill for government fuel subsidies could hit $20 billion.
The oil marketing companies are pitching in, too. Despite the 40% price increase, the state-owned oil companies estimate that they lose almost 40 cents on every gallon sold at current prices. The loss on a gallon of diesel fuel is about twice that.
On the one hand, fuel subsidies don't seem sustainable at these levels. The drain on the government budget is huge, and the burden on state-owned oil-marketing companies immense. Subsidies keep fuel demand higher than it would be at market prices, and India already runs a trade deficit that came to $22 billion in the third quarter of fiscal 2011. The government certainly remembers that in 1991 a technically bankrupt India had to pledge its gold reserves to secure a loan from the International Monetary Fund.
