Oil industry has little margin for error

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Oil industry has little margin for error Just-in-time delivery pinches consumers when problems hit

By Dina Temple-Raston USA TODAY

This may be just the beginning of American motorists' year of discontent. Analysts say this summer's rocketing gas prices may provide a taste of the future: In an energy distribution system that provides little margin for error, price spikes could well become a fact of a driver's life.

This time around, it was Midwesterners who got socked by a fatal combination of thin supplies, new government regulations for cleaner-burning gas, pipeline failures and heavy demand.

On Sunday, the average cost for a gallon of regular gasoline in Chicago topped $2.11, compared with $1.65 nationwide, according to American Automobile Association figures.

The root of the problem, analysts say, is the USA's energy distribution system, which has become such a complicated process, almost any disruption can wreak havoc and drive up prices.

''I call it the Jennifer Lopez Grammy dress market,'' says Tom Kloza, chief oil analyst at Oil Price Information Service. ''It's probably OK, but there's no margin for error.''

This spring, for example, two major U.S. pipeline outages contributed to dizzying gas prices in the Midwest. A fire at the Explorer pipeline outside St. Louis forced operators to reduce the gas flowing through the line by 10%, to 500,000 barrels a day, the Department of Energy says.

In June, the Wolverine pipeline, which runs from Niles, Ill., to Jackson, Mich., sprang a leak, requiring gas to be trucked around the break.

Then, just last week, a Sun Oil refinery in Philadelphia had a problem with a catalytic converter and had to slow production. Oil traders reacted immediately. The price of oil for September delivery went up 5 cents in anticipation of potential heating oil supply problems, says Bill O'Grady, oil analyst at A.G. Edwards.

''It doesn't take much to disrupt the market,'' he says. ''There is a delicate balance here.''

That's become the case for a number of reasons. To begin with, oil companies, seeking to whittle down costs, are holding smaller stocks of crude oil and refined products than they used to. Crude oil and gasoline stocks are typically kept at 500,000 barrels today, down from the 800,000 barrels that refiners kept on hand in the early 1980s.

Larding up excess capacity in case of emergencies doesn't make business sense, analysts say. ''In every industry, inventory is the bane of the industry,'' Kloza says, adding that oil companies are trying their hand at just-in-time inventory.

What's more, to save money, oil companies don't lease fields they aren't ready to explore and they have been slow to invest in refineries in the wake of ever-changing environmental regulations. In fact, most U.S. refineries are more than 30 years old.

To complicate matters further, individual states have adopted their own requirements for cleaner-burning fuels, and refiners are forced to offer a boutique of different gasolines.

In the Midwest, for example, they blend gas with ethanol while an additive called MTBE is used in the rest of the country.

In the past, it was easy for companies to find alternative sources for fuel if supplies grew thin. That's less true today because there are so many products. The U.S. distribution system was designed and built to handle half a dozen grades of gasoline. Since the 1970s, petroleum companies have produced at least seven new varieties of cleaner-burning fuels, according to the American Petroleum Institute.

Consider California. After the state declared it would require a special reformulated gasoline to help reduce smog in March 1996, gasoline prices soared skyward -- up 30% to $1.60 a gallon.

Today, oil capacity in the state is so razor thin that gasoline suppliers have to find out-of-state refiners to make up shortages. That tends to drive up prices.

''This is not an industry that can turn on a dime. And when something goes wrong, there isn't much room to deal with it,'' O'Grady says. ''It is hard to anticipate where something might go wrong next.''

Case in point: A weekend explosion at Kuwait's biggest refinery threatens to cause fresh shortages of oil and liquefied gas. The Kuwaiti government declared a force majeure, which gives it the right to not supply all the oil and gas they have contracts for. The move drove up futures prices for gasoline and crude oil in Europe.

About 80% of Kuwait's refined oil and 70% of its crude exports go to Asia and Europe, so the accident didn't affect U.S. oil markets much.

''I am always worried about disruptions,'' says Tom Bentz, oil analyst at Paribas Futures. ''Anything could happen -- a strike, something with Iraq -- and that would affect prices. People say prices will dip around Labor Day. But even after that -- this isn't over.''

''If you hear of a major hurricane headed for the Gulf, you might want to fill your gas tank,'' Kloza says.


-- Cave Man (caves@are.us), June 27, 2000


OH..the PAIN. I FEEL YOUR PAIN, YOU SUCKERS. But I just forced myself to pay a whopping $1.439 for that thar DIESEL that BRER GAREEEEE' Ducts himself said I would be needing in Mah Lil Ole Mercedes.

-- cpr (buytexas@swbell.net), June 27, 2000.

>> OH..the PAIN. I FEEL YOUR PAIN, YOU SUCKERS. But I just forced myself to pay a whopping $1.439 for that thar DIESEL that BRER GAREEEEE' Ducts himself said I would be needing in Mah Lil Ole Mercedes. <<

Well, if you ask me, Gary North may have been right about the diesel, but cpr was right about the diesel, too. And cpr was right about Y2K. He was too modest to mention that, so I thought I'd mention it for him.

And as for our being suckers, well, I feel certain that cpr wasn't addressing that remark to Andy Ray, who was also right about Y2K (for those who missed that fact) although Andy Ray just might end up reading this thread and might possibly (mistakenly) take "YOU SUCKERS" as being addressed to him, just because it maybe sounds like it.

Oh my! I suppose cpr could have made it a tad bit clearer just who "YOU SUCKERS" were. But, when you are right as often as cpr has been right about Y2K, sometimes you forget to cross all your t's and dot all your i's. It's only natural, and in no way detracts from his being right about Y2K.

Andy Ray, please don't get mad at cpr over this. I don't think he meant it that way.

I think it was just the "SUCKERS" he was talking to, the ones who thought Gary North might be right about needing diesel fuel, not to you or the other right thinkers who knew Y2K was going to be a non-event and can proudly point to that fact for the rest of your lives (unlike me, who was wrong about Y2K).

-- Brian McLaughlin (brianm@ims.com), June 27, 2000.

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