[Who's to blame? Surpise, surprise, it's OK - but also "market forces" (!). Two years ago the Economist told us we were 'drowing in oil' and predicted the price would fall to $5/bbl.] Protesters outraged by high petrol taxes brought parts of Europe to a halt this week. But are taxes really the root cause of the oil crisis? IF IT had not really happened, it might seem absurd: one of the world�s big oil producers, a developed country with a well-diversified economy, almost grinds to a halt because many of its petrol stations run out of stock. Yet that is precisely what happened this week in Britain, a country self-sufficient in oil thanks to its North Sea fields, as well as across several other European countries. Protesters blame their governments for excessive petrol taxes. Politicians in turn blame oil firms for not doing enough to distribute fuel. Others hint at collusion by the oil firms to keep prices high. Oilmen grumble that they are being unfairly attacked; they blame governments for imposing taxes and the OPEC cartel for production cutbacks. Completing the circle, OPEC blames western governments for excessive taxation. So who�s really at fault? The culprit that the protesters have latched on to, fuel taxation, is undoubtedly the easiest target. After all, well over half of what most European consumers pay at the pump goes to their governments, not to oil firms or to OPEC; in Britain, four-fifths goes as tax. Even more irksome, no doubt, is the fact that petrol taxes in Europe are far higher than in America. Except in France, politicians have so far stood firm in the face of blackmail from protesters. But their resolve may not last: Europe�s transport ministers have arranged to meet next week to discuss taxation. If Europe�s politicians do slash petrol taxes, the move would be rich in irony. That is because taxes are not the cause of the recent volatility and price spikes in the oil market. Taxes are indeed the reason European drivers pay much more for fuel than Americans, but this has been true for many years. It is also the case that European governments have grown fond of the receipts from these taxes, which were originally introduced to promote energy efficiency, reduce congestion and so forth. That was also true two years ago, however, when Europe saw no such protests. What is different today is that the crude-oil price has more than tripled to over $30 a barrel, and the rise has passed through to the retail price. If anything, Europe�s higher petrol taxes have protected consumers from wild crude-oil price swings, while America�s tax regime has left its consumers more painfully exposed to the whims of OPEC. The tripling of crude prices has led to far sharper retail-price increases in America than in Europe. This was no accidental by-product of politicians� greed. In the wake of the oil shocks of the 1970s, policymakers in Europe and Japan took deliberate steps that made it harder for OPEC to hurt their economies. The cartel, too, is well aware that taxes have caused it to lose much economic power to consumer economies. This is why its officials complain so loudly about unfair taxation. Such grumbling also conveniently deflects attention from the real reason that oil prices are so high and volatile: OPEC itself. It was the cartel�s botched effort to manage prices through production cuts that sent oil soaring uncontrollably past $30 a barrel in the first place. The cartel�s gathering last weekend in Vienna offered further evidence of bungling. Ministers had gathered with the self-professed aim of bringing stability and lower prices. What the overheated market needs is lots of new oil, now. All OPEC came up with was a confused announcement about a quota increase of 800,000 barrels a day: Saudi Arabia says that figure represents fresh barrels, but others fear that it will merely legitimise current cheating on quotas, and will produce little genuine new oil. Ministers have also confused traders with talk of a half-baked price-band mechanism that was meant to keep crude oil between $22 and $28 a barrel. Adding to the confusion, the latest production increase will not kick in until October 1st, and will last only two months, not the six months typical of previous cartel agreements. Ali Rodriguez, Venezuela�s oil minister, did not help by asserting this week that OPEC stands ready to increase output by 2m barrels per day�an implausible claim. Surprise, surprise All these are signs of the cartel�s murkiness and incoherence, the key drivers of oil�s volatility. Another example is the surprise announcement that ministers will hold yet another meeting in November. Nobody is clear about how they will meddle in the markets then, or at their heads-of-state summit on September 27th-28th. Robert Priddle, head of the International Energy Agency, a quasi-governmental body representing rich countries, says that it is foolish for OPEC to strive for stability through unilateral market management�it has achieved the opposite. Such fuzzy signals muddle any good that the cartel�s quota increase might have done to reassure markets. This uncertainty is likely to keep prices high. If that happens, it might provoke another sort of government intervention: the United States is likely to release oil from its Strategic Petroleum Reserve to cool the market. Already, President Bill Clinton has authorised the build-up of a new heating-oil reserve for America�s north-eastern states, which are most vulnerable to an early winter freeze. Traders say this move might make the squeeze worse, if the government competes for oil in the already tight market to fill that reserve. To be fair, OPEC is not the only culprit. Perversely, the rise of market forces (in what remains a highly flawed market) has also contributed to the recent volatility. For example, recent consolidation and tightness in the oil-storage and tanker-shipping businesses have both made the market jumpier. These may act as production constraints: Vahan Zanoyan of the Petroleum Finance Company argues that, even if OPEC decides to produce lots more oil, it will struggle to get it to market quickly. Another factor contributing to volatility has been the oil giants� move towards just-in-time management of stocks and deliveries. Firms are keeping far lower inventories than they might have done at this time of year a decade ago. This is good for shareholders, as their capital is no longer tied up in excess stocks. But it may also mean that the industry loses a valuable buffer. Philip Verleger of the Brattle Group, a consultancy, argues that OPEC itself has also embraced this low-inventory approach since last year. The cartel may have been inspired by Mobil�s successful cost-reduction campaign before its acquisition by Exxon, known as KILL: Keep Inventories Low and Lean. Also keeping prices high is the fact that $30-plus oil has not produced the response seen during past upswings in the oil cycle: an orgy of upstream spending by firms not linked to OPEC that would temper crude prices. This is because the oil business has been undergoing a radical transformation over the past few years, away from a fixation on volume and market size and towards financial targets such as returns on capital. Prompted in part by the collapse in oil prices to $10, a wave of mergers swept through the industry, producing such giants as Exxon Mobil and BP Amoco (now BP). The new mantra of Big Oil is financial prudence; indeed, the biggest firms are awash in cash (see chart). Exxon Mobil spent only $2.4 billion on exploration and production in the second quarter of this year, against $3.5 billion in the same period last year. The most powerful force fuelling oil�s volatility, as this week�s ructions showed, is the black stuff�s paramount importance in transport. During earlier shocks, developed economies were grossly inefficient in their use of oil; since then, governments have used such tools as energy taxes to make their economies more efficient and less reliant on oil. They have largely succeeded, except in transport�where, despite soaring petrol taxes, oil remains king because the alternatives are expensive and impractical. Most of OPEC�s oil now goes to a sector that cannot at present live without it. The upshot of all this may be that, even after all the lessons learned by rich countries from earlier shocks, oil still has the ability to humiliate western leaders and batter their economies. That will add to the misery of European leaders enduring this week�s petrol crisis. Still, they might find some perverse comfort in news that the tables are about to be turned on their tormentors. This week, it was Britain that was brought to its knees. Soon, it might be a pillar of OPEC: Venezuela�s biggest petrol-workers� union is now threatening to stage a crippling strike during OPEC�s grand heads-of-state gathering. Oil can be a double-edged sword. _______________________________________________ Crashlist resources: http://website.lineone.net/~resource_base To change your options or unsubscribe go to: http://lists.wwpublish.com/mailman/listinfo/crashlist
