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Philip Verleger

Philip Verleger

Dr. Philip K. Verleger, Jr., has studied and written about energy markets since 1971. His earliest research, published in 1973, addressed the determinants of gasoline…

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Trump’s Last Chance To Subdue Gasoline Prices

The oil industry has done its best to play down the oil market effect of the impending IMO 2020 rule. Executive after executive has tried to reassure politicians and policy makers that no substantial impact will occur. As always, though, oil executives have been parsimonious with the facts. In my experience, these individuals do not lie; they just say as little as possible.

Things are changing, however. The opinions of some in the industry have now been revealed via a new group called the “Coalition for American Energy Security” (CAES). As the CAES “About Us” webpage explains,

The Coalition for American Energy Security (CAES) is a diverse and broad coalition of American manufacturing workers, integrated energy companies, refiners, industry associations, shipping companies and other groups that play a crucial role in the maritime fuel supply chain. We believe the United States should adhere to the scheduled implementation of the International Maritime Organization’s (IMO) standards, which will reduce sulfur emissions from nautical fuel by 80 percent when they take effect in January 2020.[1]

This PR effort should not surprise anyone. Oil refining is a capital-intensive, low-return business. Profits tend to be depressed during periods of stable demand and supply, unchanged government regulations, and high crude prices. Profits rise when crude prices fall, when operations at facilities are disrupted, or when consumption increases unexpectedly.

The real opportunity for profit, though, occurs when environmental regulations change in a way that makes it more difficult to produce specific products. This occurred from 2004 to 2008, a time labeled the “Golden Age of Refining.” In 2004, gasoline prices and US refiner profits surged when the US Environmental Protection Agency tightened rules on motor fuel sulfur content. A Wall Street Journal article noted that imports from traditional sources dropped because foreign refiners could not make lower-sulfur products. Prices and US refiner profits surged, as WSJ reported:

Independent refiners, in particular, are enjoying an unusually strong run. Take Valero Energy Corp. VLO 0.16%, which has grown from one refinery 20 years ago to 15 today. The San Antonio company earned more profit in the second quarter of 2004—$633 million—than it did all of last year. Valero’s share price has soared nearly 50% since the beginning of the year and more than 250%, or more than tripled, since December 1998.[2] Related: After Libya And Venezuela, Is This The Next OPEC Wildcard?

In the first months following the implementation of the new low-sulfur rules, refining margins rose by almost $5 per barrel. If one adjusts for taxes and retail distribution costs, these margins may have doubled. Today as in 2004, the members of CAES have no interest in the consumer or common good. The companies that have joined the organization understand that the IMO 2020 regulation offers an opportunity to make record profits if President Trump does not intervene.

Platt’s Meghan Gordon explained that trade groups created the CAES weeks after The Wall Street Journal published an article describing the ways in which the Trump administration was considering delaying the IMO 2020 implementation. After observing that the White House wants to push back the sulfur rule deadline of January 1, 2020, authors Timothy Puko and Benoit Faucon noted the following:

The White House says the administration is focused on the damage rising fuel costs might have on the economy, but some administration officials concede the timing of the implementation could have political implications in an election year.

“Few things terrify an American president more than a spike in fuel prices,” said Bob McNally, a former energy adviser to then-President George W. Bush. “If President Trump learns that IMO 2020 risks a big fuel oil-price spike in the winter of a presidential election, he is going to object.”[3]

In her article, Platt’s Gordon suggested that Trump is powerless in this regard beyond his tweeting:

So if US pump prices or oil benchmarks spike ahead of implementation day, what can the White House do to delay IMO 2020? Not much at all—short of building a majority coalition supporting delay ahead of the IMO’s Marine Environment Protection Committee meeting in May. That looks very unlikely, though, after the panel in October already rejected a proposal for a soft rollout of the standards.

Trump does hold a few tools that he could use for domestic messaging purposes if prices spike: releasing fuel from the 1 million barrel Northeast Home Heating Oil Reserve or ordering an emergency crude oil drawdown from the Strategic Petroleum Reserve.

If Gordon is correct, one should ask why oil refiners and others are putting money into the CAES? Why suddenly is the IMO 2020 issue receiving such attention from firms like Valero?

The answer is simple. Trump has access to two tools that Gordon ignored. One is the “Emergency Economic Powers Act of 1977.” Another is the “National Emergencies Act,” which is almost one hundred years old. Either could be used to constrain the activity of US refiners.[4]

The most likely restriction would involve imposing limits on exports of diesel fuel and gasoline. The US is a net exporter of both fuels, although some regions are net importers. The CAES members are undoubtedly worried that the president might invoke his executive powers to cut these exports—and perhaps those of other petroleum products—should US refiners not act to ensure that the fuel supplies needed to keep prices at current levels are made available to US consumers.

As Bloomberg’s Liam Denning and Elaine He noted prior to the 2018 midterms, higher gasoline and diesel prices hit red-state voters hardest:

It is 110 days to the midterms, and you will likely visit the gas station many times between now and then. Related: Oil Slips As Alberta Relaxes Oil Production Cuts

Hence there’s an all-hands effort to keep a lid on pump prices. Pushed by the tweeter-in-chief, Saudi Arabia has executed a supertanker-size U-turn, pushing barrels back onto the market. Congress, meanwhile, threatens new legislation allowing lawsuits against OPEC (not for the first time). And there is now open debate about President Donald Trump dipping into the Strategic Petroleum Reserve for a little relief (something we warned about here last month).[5]

Denning and He concluded that “it is the curse of U.S. presidents that whoever sits in the Oval Office gets blamed for high oil prices despite having little control over them.” At the time they wrote, President Trump had not yet declared a national emergency. He now has. As a result, $6.5 billion in defense spending will be reallocated to build a border wall despite the objection of the US Congress. Does anyone doubt he would act in a similar fashion if the IMO 2020 implementation leads to higher gasoline and diesel prices? Should prices rise, Trump could declare another national emergency, and his action will crush the independence of the US refining sector. If necessary, the president will take steps to avoid the negative political fallout from higher fuel prices.

The CAES clearly fears this outcome, but it is powerless to stop the president’s intervention, thus its preemptive campaign casting the IMO 2020 rule as essential for America’s energy security and job growth. The members know that if Trump acted to lower US gasoline and diesel prices, he would be cheered by almost every voter. There would be no effort to block his move. The oil industry has few supporters in Congress and even fewer among the general population.

[1] See About CAES: Who We Are [https://tinyurl.com/y2uemx76].

[2] Thaddeus Harrick, “Independent Refiners Are Enjoying Strong Run,” The Wall Street Journal, August 19, 2004 [https://tinyurl.com/y5qsdvcu].

[3] Timothy Puko and Benoit Faucon, “U.S. Seeks More Time for Ships to Switch to Cleaner Fuels,” The Wall Street Journal, October 18, 2018 [https://tinyurl.com/yaz9d9xw].

[4] See Harold C. Relyea, “National Emergency Powers,” Congressional Research Service, February 27, 2019, update by Elaine Halchin [https://tinyurl.com/y3mvekk3].

[5] Liam Denning and Elaine He, “60 Reasons Trump Worries about Pump Prices,” Bloomberg, July 19, 2019 [https://tinyurl.com/y37lbjjy].

By Philip Verleger for Oilprice.com

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  • Robert WitbolsFeugen on March 19 2019 said:
    PHILIP VERLEGER is advocating political manipulation of world energy policy while ignoring the environmental impact of those same policies. In his attempt to persuade the masses that big oil is never a friend of the consumer he blindsides the consumer to look only into his pocketbook for the answers.
    I'm sure Philip knows what happens when refinery capacity is limited because of financial constraints imposed by the Government, as in Mexico and Venezuela. Imagine what price the US consumers would pay if the USA had fuel shortages due to refineries not being able to meet global demand. Surely then, oil suppliers will be responsible for the global financial collapse.
  • Scott Dorgan on March 20 2019 said:
    I.E. Thank god Trump is in the white house and not some lifelong bureaucrat who does not understand how business works.
  • Mamdouh Salameh on March 20 2019 said:
    President Trump has been tweeting loud and clear that he wants low gasoline prices which he looks upon as tax cuts particularly when he is seeking a second term.

    Here are what President Trump can and can’t do to subdue gasoline prices and perhaps those of other petroleum products should US refiners not act to ensure that the fuel supplies needed to keep prices at current levels are made available to US consumers. One has to remember that the Republican Party lost control of the US House of Representatives in the 2018 midterm elections of the Congress because of higher of gasoline and diesel prices.

    President Trump could dip into the Strategic Petroleum Reserve for a little relief. He could also declare a national emergency as a he did in order to secure funds to build a border wall with Mexico. But in so doing, he would be crying wolf frequently without being able to provide a justification.

    However, what President Trump can’t do is to try to con Saudi Arabia again as he did last year when he exerted huge the pressure on it last June to raise its oil production to offset an expected decline in Iran’s crude oil exports resulting from US sanctions. Saudi Arabia obliged even against its own national interests but ended up with oil prices crashing from $87 a barrel to $50, a reduction of 43% and with the Trump administration issuing sanction waivers to the eight largest buyers of Iranian crude.

    As it happened, US sanctions have so far failed to cost Iran the loss of even a single barrel of oil. Moreover, the Trump administration has no alternative but to renew the sanction waivers it issued last year to the eight biggest buyers of Iranian crude when they expire in May or issue new ones for no other reason than to use them as a fig leaf to mask the fact that US sanctions have yet to cost Iran the loss of even a single barrel and the fact that the zero exports option is a bridge too far.

    Another thing President Trump can’t do is to threaten OPEC with the NOPEC legislation first and foremost because OPEC is not a cartel and has never been one through its history, second because such a measure would lead to more tightening of the global oil market and steep rising oil prices (and therefore higher gasoline and diesel prices) and third because OPEC has enough firepower to retaliate against the US and inflict damage on the US economy where it hurts most, namely high oil prices and a switch from the petrodollar to the petro-yuan thus the undermining the core of the US financial system.

    In the final analysis, it is doubtful as to whether President Trump could subdue gasoline and diesel prices. Oil prices are headed upwards probably reaching $80 or even higher this year buoyed by a growing global economy, a rising global oil demand adding 1.55 million barrels of oil a day (mbd) over 2018, positive indications of an imminent settlement of the US trade war with China and China’s insatiable thirst for oil with its imports projected to hit 11 mbd this year.

    Moreover, OPEC+ cuts and a strict adherence by OPEC members to the cuts and also Saudi Arabia’s steep cutting of its production and exports will most probably re-balance the global oil market by the end of the second quarter. If this didn’t happen by then, there is the possibility that the cuts could be extended until the end of the year or until the global oil market has become irrevocably balanced.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Ken on March 20 2019 said:
    Refiners do have a ace up their sleeves; they can shut down refineries for a start...
  • James Stafford on March 21 2019 said:
    Dear Dennis:

    I note your comment that you are bullish on crude. There are strong reasons to support the view today, given the prospect of tighter sanctions on Iran. However, I want to inject two words of caution: Donald Trump.

    I have been a student of market disruptions for 48 years. I began my professional career an economist in June 1971 at the economic consulting firm of Data Resources, a company whose creation was financed by Don Marron. Marron had the brilliant idea of taking two Harvard Professors around to clients to talk on economics and world affairs in the late 60s. One was Otto Eckstein, a forecasting economist. The other was Henry Kissinger. Otto convinced him to found DRI It is now part of IHS Markit.

    The global economy was shocked on August 15, 1971, two months after I started work when Richard Nixon imposed price controls and abandoned fixed exchange rates. I still remember the day – and I still remember scrambling as we tried to quantify the impacts.

    I spent the next ten years working to get the controls on oil removed. I still have the scars – as does the industry.

    In the forty-eight years since I have lost count of the number of disruptions that have affected oil and other commodity markets. I have learned to be very cautious when large changes are in order.

    The new regulations which will require the removal of sulfur from fuels used on ships not equipped with scrubber may be the most severe changes that affect oil markets ever. Much has been written about them. I have warned that diesel and perhaps gasoline prices could double. Many of my analyses are available to the public.

    Last week the International Energy Agency issued its medium term outlook. The report finds that adjustment by 2023 should be little problem. However, buried on page 117 was a comment that diesel prices could double in 2020.

    The higher prices would case a disruption in global markets.

    However, there is no way prices will double in the United States. The United States is now a net exporter of diesel fuel and is self-sufficient in gasoline. We are also self-sufficient in crude when Canada is counted. One should expect President Trump to act to block exports of crude and product should prices begin to rise. A ban would keep gasoline prices at current levels and depress crude prices. 2020 is an election year and as several writers have noted, Donald Trump’s base is particularly exposed to higher gasoline and diesel prices/

    The President has the authority to impose an export ban. I expect him to act despite the fact that it is the worst possible economic policy imaginable. His prior actions on steel, aluminum, China and other trade issues demonstrate he has no interest in the international impacts.

    The correct policy solution, of course, is to modify the IMO rules. Sadly the bureaucrats refuse. This could easily lead to Presidential action.

    Recalling the events which followed August 15, 1971 I caution your readers to be very careful in taking long positions in oil.

    Phil

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