What’s up with the prices at the pump?

Arab America gas price standoff

First, Saudi Arabia drove down the price of oil by increasing its production, which gave Americans a welcome drop in prices at the pump. Could the kingdom now be pushing them back up?

Prices at the pump have gone up nearly 40 cents a gallon from the January low—60 cents in California. Every year, at this time, refineries shut down to make adjustments from the “winter blend” to the “summer blend.”

However this year, the increase is exacerbated.

The unexpected extreme weather in the south, Bill Fleischli, executive vice president of the Illinois Petroleum Marketers Association, explained: “caused some of the refineries in the south to shut and restart, resulting in disruption for a couple of days.”

The February 19 explosion at a California refinery, that supplied 10 percent of California’s gasoline, has driven the state’s extreme uptick.

Then we have is the expanding steelworker’s strike that began on February 1—the first in 35 years. Because of refinery automation, the impact to date has been minor. However, if the strike actually shuts down operations, the Washington Post (WP) states: “the impact on gas prices could be swift.”

Opinions vary on why the United Steelworks chose now to strike—especially in a time when labor unions, according to the WP, “rarely exercise that right.” The WP explains: “There were only 11 strikes involving more than 1,000 workers last year, down from hundreds annually in the 1970s.”

Energy economist Tim Snyder sees that big refiners lose their incentive to bargain when crude oil prices fall to low levels. He told me: “The strike helps raise prices so the longer the strike goes on, the more profits they can recover.”

In contrast, energy market analyst Phil Flynn explains: “I think the Union is striking now because refining margins have been good and they want some of that benefit.”

What if the union workers chose this time to strike because of outside influence—specifically Saudi Arabia? There are many coincidences that seem too obvious to ignore.

First, the last time refinery workers went on strike was 35 years ago—about the same time as the oil crisis of 1979. Then, after the Iranian Revolution caused an oil shortage resulting in a catastrophic spike in the price of oil that drove other countries to expand production, it is reported that “to gain back market share, [Saudi Arabia] increased production and caused downward pressure on prices, making high-cost oil production facilities less profitable or even unprofitable.”

Now, increased Saudi production, once again, has driven the price drop, and, it, too, that is about maintaining market share and driving out higher-cost U.S. shale production.

But there’s more.

We think of Saudi Arabia as producing crude oil. However, according to the Wall Street Journal (WSJ), the kingdom “plans to become the world’s second largest [behind the U.S.] exporter of refined oil products in 2017 as part of its drive to diversify its economy and increase its share of the global crude and petroleum products markets.”

The Financial Post (FP) takes it further: “Saudi Arabia and its OPEC cohorts may have abandoned their role as market stabilizers, but they are taking the fight with their rivals downstream.” The FP adds: “The push downstream comes as OPEC’s strategy to maintain production and push out expensive non-OPEC producers is working.”

So, while the U.S. hasn’t built a new refinery in decades, Saudi Arabia has two new refineries—with a third planned.

The WSJ reports: “Planning for refineries in Saudi Arabia began around a decade ago to meet growing domestic fuel demand as well as to provide jobs. Domestic demand hasn’t grown as fast as expected, but as prices for Saudi Arabia’s unprocessed oil have slumped—crude prices have more than halved internationally since last summer—the refineries could offer a profitable alternative source of income.”

Note this key line from the WSJ: “Domestic demand hasn’t grown as fast as expected, but as prices for Saudi Arabia’s unprocessed oil have slumped…” This means that the kingdom has excess capacity at a time that it needs extra income.

Economists say Saudi Arabia needs tough economic reform. The Financial Times states: “The IMF wants the government to reduce the growth in spending still further, especially on wages and subsidies, and focus on infrastructure investment. But economists also worry that lower oil prices will hit the government’s capital spending, which could depress economic activity in the coming years.”

As the WSJ points out: “the refineries could offer a profitable alternative source of income.” But first, the kingdom needs outside customers—and the Steelworkers’ strike could provide just the ticket.

The U.S. is the number one global exporter of refined petroleum products. Saudi Arabia aims to capture some of that market share to become number two. We know that, when to its advantage, the kingdom thinks nothing of hurting its ally—but not friend—the United States.

Announcing the first shipment of gasoline from the new Saudi refinery on February 6, the Middle East North Africa Financial Network states: “The refinery is expected to reach full capacity in mid-February. A source close to the company said … European demand was good due to worries about the refinery strike in the United States which could reduce the amount of U.S. diesel heading to Europe.”

So a refinery strike in the U.S. hands them customers—which explains why, after dropping oil prices, the kingdom could be driving up gasoline prices.


Marita Noon 2013 greyThe author of Energy Freedom, Marita Noon serves as the executive director for Energy Makes America Great Inc. and the companion educational organization, the Citizens’ Alliance for Responsible Energy (CARE). Together they work to educate the public and influence policy makers regarding energy, its role in freedom, and the American way of life. Combining energy, news, politics, and, the environment through public events, speaking engagements, and media, the organizations’ combined efforts serve as America’s voice for energy.

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