Streetwise Professor

Postgraduate students at Oxford, Leicester, and the LSE have started a new website, International Relations. They kindly asked me to contribute a commentary piece on Russian energy politics. It is now up. I’ll cross post it at SWP in a day or two, but you might want to visit the International Relations site to read it, and then stick around for a bit to read more of that site as it is very interesting.

Gazprom is throwing a hissy fit over proposed EU energy policies. That suggests that the Europeans are onto something, so should keep it up.

But Gazprom–speaking through deputy board chairman Alexander Medvedev–is playing the divide and conquer card again: “‘We know that these measures provoke various responses in Europe. They have opponents – France and Germany,’ Medvedev underlined. ”

I’ll say again: the EU talks a good game on unity, and common policy, and its ambitions to be a world power, but its lofty words are revealed to be mere pretense by its repeated failures to devise–and implement–a unified response to Gazprom’s machinations. Unless and until Europe plays hardball–as a team–against Gazprom, it will see its energy security erode dangerously. Gazprom is making loud noises and threatening disaggregation to get its way. Now is the time–no, it is well past time–for Europe to get its act together and stand up to these threats.

From the Moscow Times via Robert Amsterdam, an article on the siloviki wars contains this pearl:

In a sign that the public dispute could be worrying investors, investment bank UBS described the recent twists in the complex saga as “discomforting” in a note to investors Thursday.

As I have been writing on SWP since April, 2006, investors should have been discomfited a long, long time ago. Day after day, week after week, there has been a procession of stories detailing the ongoing institutional degradation in Russia. The Storchak affair is only the latest, and admittedly among the most lurid, of these episodes.

In his decision in Final Accounting in the Estate of A.B. (1866) Judge Gideon J. Tucker famously said “no man’s life, liberty, or property are safe while the Legislature is in session.” In 19th century America, this was more than a little bit of hyperbole. In Russia, it is no hyperbole–it is stone-cold truth–to say “no man’s life, liberty, or property are safe while the siloviki are awake.” And they never sleep.

Tom Fowler of the Houston Chronicle quotes me in a blog post spurred by US Asst. Attorney Belinda Beek’s mentioning during jury selection in the manipulation trial of several former El Paso traders that onions were not covered by the Commodity Exchange Act. As I noted to Tom, onion futures were banned due to intense political pressure from onion farmers after several episodes in which the price of onion futures plummeted, at times falling below the price of the sacks in which they were shipped.

Interestingly, in 1972 similar events in the potato market led to the proposal of a bill to ban potato futures. This bill failed, however, in part because a USDA study of what happened in onions after futures trading was banned; the USDA study did not find any evidence that the ban had affected pricing patterns. In a 1963 article in the Journal of Farm Economics Roger Gray found that if anything, the ban increased volatility of onion prices.

The potato contract died a somewhat unnatural death a few years later due to several spectacular manipulation attempts, but this time Congress did not commit the murder. In one of these manipulations, in 1976, both a big long and a big short were trying to manipulate the contract simultaneously, with the short trying to ship huge quantities of potatoes from Idaho to Maine (the delivery point) and the long tied up most of the railroad cars on the Bangor & Aroostook Railroad (in which delivery had to be made). There was a large default against the futures contract. The default severely damaged NYMEX’s reputation. Here is a court case that provides some of the lurid details.

Ironically, the demises of the onion and potato contracts were perhaps the best things that happened to the CME and NYMEX, respectively. The loss of these contracts forced each exchange to innovate to find replacements. CME developed meat futures (including the legendary pork belly contract, which is now fading away but was once the hottest thing in town) to replace onions. NYMEX, under the leadership of Michael Marks, developed energy futures. (Which, funnily enough, a commenter on the Fowler post says should be banned. La plus ca change.) Necessity as the mother of invention, futures exchange edition.

The common feature of potatoes and onions is perishability. Perishability makes prices inherently volatile, and also can make some manipulative strategies possible. Indeed, short manipulations are likely to be more profitable for things like onions and potatoes than other products because dumping additional supplies on the market can depress prices sharply because the perishable good must be consumed almost immediately. This allows someone short futures to profit substantially.

OPEC is trying to lay blame for high oil prices anywhere but on its own doorstep:

Mr El-Badri said, however, that the the “US should help to resolve the problem” and enumerated several factors, among them bottleneck in refining, geopolitical concerns and the weakness of the US dollar, that were affecting the oil price.

“The US has not invested in refining capacity in 30 years. The refineries are operating at 80 per cent. That is not adequate,” Mr El-Badri said. “We have also the problem of the dollar,” the secretary general added.

Mr. El-Badri is either laying on the bullshit with a big trowel, or he needs a lesson in basic economics. (My money is on the former alternative.) “Bottlenecks in refining” cannot explain current high oil prices. Indeed, refining bottlenecks cause the price of crude to decline relative to the price of refined products. An outright decline in refining capacity should cause the price of crude to fall. Consider the extreme case where there is no refining capacity at all. In this case, the price of crude would be zero because there would be no use for it as it could not be refined into anything useful. Crude would be as it was before Drake–a nuisance, a pollutant.

In fact, refining margins have declined substantially as crude prices have risen. An increase in demand for refined products would cause an increase in the price of crude–but the price of refined products would rise even more. Indeed, if refiners were operating at absolute capacity (infinite marginal cost of refining an additional barrel–the extreme bottleneck), an increase in demand for refined products would cause the price of gasoline and heating oil to rise, but the price of crude would not budge as due to the putative bottleneck in refining the increase in demand for refined products would NOT translate into a rise for the derived demand of crude. Moreover, US refineries have been operating at 80 or better for years. Sure, no refineries have been built from scratch, but refining capacity has continued to grow as refiners expand existing facilities. And memo to Mr. Al-Badri, with the exception of the 2005-2006 time period, refining has hardly been a wildly lucrative business. If it were the major bottleneck, refining would be a lot more profitable.

Thus, the simultaneous rise in the price of crude and a decline in refining margins is flatly inconsistent with El-Badri’s “explanation.” It is instead consistent with an adverse crude supply shock. Such a shock causes the price of crude to rise and refining margins to decline. Therefore, contrary to El-Badri’s babbling, price relations in the petroleum markets point directly to crude supplies–and crude suppliers–as the culprit.

The dollar story is also so much eyewash. Econbrowser does a very good job at debunking this chestnut. The price of crude is rising in terms of other currencies, and variations in the value of the dollar are not significantly correlated with changes in the price of oil.

So, let’s give El-Badri’s explanations the respect they deserve–none–and move on to the interesting issue. OPEC says it won’t raise output. There could be two reasons for this: they don’t want to, or they can’t. There are clearly some countries (notably Iran and Venezuela) that don’t want OPEC to increase output. But there are a lot of folks out there–notably Matt Simmons–that have been trumpeting the view that Saudi Arabia in particular is facing an inexorable decline in production, and is incapable of enhancing output even if it wanted to. Simmons and the peak oil crowd are the most outspoken on this issue, but there is reason to doubt whether the Saudis actually have the capacity to increase output. There is an intense debate over whether the recent decline in Saudi output was volitional, or instead resulted from the peaking of its megafields. That debate won’t be resolved any time soon, but OPEC’s (and KSA’s) refusal even to consider increasing output, and their lame rationalizations of the causes of the recent runup in oil prices, lend some credence to the view that Saudi Arabia has less available productive capacity than it claims.

I was quoted extensively in this article on energy speculation by Isabelle Cleary. The photo is not, shall we say, representative of my current appearance. Whether that is a good thing or a bad thing is a matter of some dispute in certain quarters, most notably in chez Pirrong.

Substantively, Isabelle’s article is a good and thorough one, which is not surprising because she is a knowledgeable reporter. (I say this not just because she quotes me now and again, but because it’s true.) At the very least, it’s nice to see a balanced presentation of the issues regarding speculation and manipulation in the energy markets.

From Reuters an article on Russian fuel shortages:

Russia’s transportation fuels market is facing its biggest crisis in almost 20 years as severe shortages force some retailers to close their filling stations.

As global oil prices beat records, Russian firms are rushing to export both crude oil and refined products. That, combined with outages at refineries in central Russia, has caused a spike in wholesale gasoline and diesel prices.

The shortages have forced wholesalers to ration supplies to retailers, who in turn are unable to pass on higher costs after pledging to the Kremlin to keep pump prices stable ahead of a Dec. 2 parliamentary election. . . .

In May of this year, major oil firms pledged to keep petrol prices capped until the 2008 presidential elections despite rising wholesale prices.

As day follows night, price controls–even informal ones (although given enforcement mechanisms in Russia one would be well-advised to live up to such pledges)–lead to shortages.

There is an interesting contrast between what is going on in Russia and events in China. In Russia, the state is apparently not using compulsion to force recalcitrant refiners from selling petrol at unremunerative prices, nor is it subsidizing consumption, whereas both things are going on in China. Hence, Russian refiners are selling more abroad, and there are shortages at home, whereas in China there are few shortages.

And speaking of China, the FT’s Energy Special had this tidbit about the situation there, which is consistent with my earlier conjectures:

The companies have been given a degree of licence to go offshore in search of energy assets, but at home they are constrained by numerous regulations, most importantly the government’s power to set prices.

The price controls, which have turned into a price freeze in the last six months of this year, as part of a raft of measures to control inflation, have prompted an almost annual stand-off between the government and Sinopec, the main refiner, in recent years. China last raised prices at the pump 17 months ago.

With the government declining to allow local prices to rise in line with global levels, refiners have been losing tens of millions of dollars on imported oil.

At the year’s end, they have usually been compensated out of public funds.

In the meantime, however, the companies play cat-and-mouse with the government, cutting production, to register their displeasure with government policy, resulting in embarrassing shortages.

So, through subsidies and compulsion, the Chinese government has encouraged sufficient production to meet demand at the subsidized prices. The shortages that occur appear to be a Sinopec bargaining tactic. In contrast, Russia is living with shortages.

Apropos my earlier analysis of the food price freeze pledge, the experience in the Russian gasoline market foretells coming shortages for basic food products, and I have read some reports of hoarding. This is especially true inasmuch as the inflation rate appears to be rising more rapidly than forecast. This may reflect the injection of liquidity into the market in response to concerns about the stability of the Russian banking system during the subprime credit crisis.

And there is also reason to wonder whether, in light of these increasing inflationary pressures, whether the government will have the stones to allow fuel and food producers to raise prices post-election, given that they know that prices will spike dramatically when they do. Their choice in March: a price spike, or growing shortages, either of which may take the bloom off of Putin’s rose pretty quickly come April. Thus, short-term political calculations have put the Russian government in something of a box. I guess they’ll worry about that tomorrow, just like Scarlett O’Hara.

A few things that caught my eye in my Friday flight delay readings:

1. This report by the European Council on Foreign Relations makes several points that I have been advancing on SWP for the past year or so. (Passing strange, perhaps, since ECFR is supported by George Soros, not exactly a kindred spirit of yours truly.) In a nutshell, Europe (even absent American support) has every objective advantage vis a vis Russia–population, wealth, human capital, even military capacity–but Russia beats EU like a drum. And it does so for one reason–the lack of a coordinated European strategy towards Russia. The EU has been a colossal failure in overcoming collective action problems when dealing with Russia. Call it divide and conquer, call it disaggregation, call it whatever; Russia has ruthlessly exploited the individual interests of EU member states, and induced individual countries to fall prey to the prisoner’s dilemma. Europe’s vaunted soft power has proved a poor match indeed for Russian hardball. Europe’s abject failure makes a mockery of the EU’s pretensions to superpower status. It has proved masterful at coordinating state meddling in the lives of its individual citizens, and an abject failure in coordinating responses to common threats.

2. I find the whole Putin as Father-of-the-Nation thing truly creepy. This harkening back to the birth of the Romanov dynasty represents just another attempt of the Putin clique to implement Orwell’s dictum that he who controls the past controls the future. The equation of the 1990s to the Time of Troubles is a real stretch, but is intended to communicate several messages. Most importantly, during the Time of Troubles, Russia (or more properly, Muscovy) was invaded by foreigners (Poles, to be specific); the present Russian elite similarly wants to assert that Russia experienced a virtual foreign conquest in the 1990s, and that Putin et al drove out the invaders. All they need is some foreigner’s ashes to shoot out of the Tsar Cannon to symbolize their victory.

And speaking of an interesting twist on historical revisionism, the Putinist view of the Bolshevik Revolution is that it was A Coup Led By Dangerous Radicals. Richard Pipes, call your office. It is ironic indeed to see the Pipes interpretation of the Bolshevik Revolution given such a ringing endorsement by the current Russian government. It is the right interpretation, but the motives for its adoption are very interesting. Putin et al want to delegitimize any challenge–current or historical–to the current political order. To double up on the irony, the current administration clearly admires–and arguably wants to emulate many aspects of–the Stalin era which cemented the control of the Bolshevik/Communist Party. That is, the Bolshevik’s destabilization of the Provisional Government was bad, but Stalin’s stabilization of the Bolshevik’s control over Russia is good. OK. Whatever. What is stabilized is a matter of secondary importance; stability itself is the primary thing.

Robert Coalson has an interesting take on this:

The logic of the analogy between the Bolshevik Revolution and the Time of Troubles leads to the conclusion that Soviet dictator Josef Stalin was the strong, authoritarian leader-for-life who pulled the country out of chaos and, through a far-sighted program of industrialization and collectivization, created a country that was capable of withstanding the onslaught of Nazi Germany and of competing in the Cold War for decades. The Kremlin, of course, is wary about direct praise of Stalin, largely because of how such statements are seen in the West. In addition, the means by which Stalin came to power — infighting, betrayal, show trials, and persecution — are clearly less savory than the image of the Grand National Assembly that elevated Mikhail Romanov on a wave of national unity.

Putin has co-opted the Stalinists. However, Putin has made enough overtly pro-Stalin statements over the years to have lured away virtually all the Stalinists from the Communist Party. He has restored Stalin-era state symbols and has stated directly that the country has no need to feel guilty about its past. During Putin’s years in power, Stalin’s reputation has grown steadily, with more and more Russians stating that he played “a positive role” in Russian history. State television commentator Mikhail Leontyev wrote in “Profil” this month: “What Stalin inherited from the Bolsheviks as an object of state — in fact, imperial — restoration was an absolutely Asiatic formation that could only be managed by Asiatic methods — literally those of Genghis Khan. That is, by using ‘the masses’ as raw material, fuel for the historical process. There were no other means for managing that country, for saving it, for securing it in the midst of an aggressively oriented environment.”

But the analogy between the revolutionary period and the Time of Troubles is emphasized in Putin’s Russia. Both were times of internal division, chaos, famine, foreign intervention, and widespread suffering that presented an existential crisis to the country.

3. Read this article on the nationalization of protection rackets in Russia and tell me that the country has glowing growth prospects. In essence, there is an informal tax structure operating in parallel with the formal tax structure. (The formal structure, by they way, actually has some admirable features.) The state protection rackets are effectively taxing entrepreneurial activity in Russia. This will inevitably dampen growth.

4. An article by Aleksandr Aleksandrovich Konovalov in Nezavisimaya Gazeta (reproduced in Johnson’s Russia List 2007-#223) is worth reading in full. This part is of particular interest:

Actually the last thing the behavior of President Putin in recent months resembled was the behavior of a “lame duck,” that is, the politics of a departing president. More likely just the opposite, he was never so active in making new appointments, and they obeyed strict logic. Only people who were close and absolutely loyal were appointed to key political posts. Moreover, what was required of them was not so much experience and knowledge of the subject as the ability to
monitor large financial flows. In effect it turns out that a system of state corporations with gigantic budgets and very questionable economic effectiveness is being created in parallel to the government. All this does not seem like preparing for departure and the replacement of the government, but instead seizing the dominant heights in the economy and politics that will make it possible to preserve this power.

In practice only two obstacles can arise to implementing such a plan. First, it is essential that the voter all the same votes for Zubkov as president, and second, there is a likelihood, though a small one, that coming to the Kremlin, as president Zubkov would get out of control and want to “steer” (the ship of state) himself. At any rate, Russian political history is still unaware of any case where a politician (even a very weak one) resisted such a temptation if the winds of fate put him in the position of an absolute master.
[Emphasis mine.]

As for the first task — the election of Zubkov as president — it does not look complicated. In conditions where 40% of the voters are willing to vote for anybody President Putin points his finger at, it is not hard to “develop” the necessary additional 10%. But then no one would undertake to guarantee the stable and loyal behavior of the person selected by the president of Russia. It was actually specifically to ward off such a threat that all the appointments and changes in the power structures were in fact undertaken. But, I repeat, the president’s decision to be at the top of United Russia’s list in the upcoming elections once again shuffled all the cards.

The President Is Not Playing by the Rules

One gets the impression that before the United Russia congress, Putin’s plans began to change; and decisions are being made in terrible haste, “on the run,” as people say. One gets the feeling that the president suddenly realized (or someone
explained to him) that power in Russia cannot be given away for half a year or even for half an hour. You will certainly not get it back. There are feverish searches underway for a way out of the trap in which both the president himself and his closest associates have found themselves. If such things exist, of course. In any case, from the outside one gets the impression that the
president no longer trusts anybody. That is why Vladimir Putin’s announcement at the United Russia congress that in certain conditions he might take the post of prime minister after leaving the office of president seems so hasty and not well thought-out. It is becoming clear that even during the parliamentary elections, Putin plans to obtain the mandate of the undisputed national leader. He may agree to take the post of prime minister or he may not, and the second option is still the most likely.

How would all this be organizationally formalized? Apparently, two offices would appear in the Kremlin. The plaque “President of the Russian Federation” would be hung in one, while “National Leader of the Russian Federation” would be hung in the other. That is absurd! An official can function in a system of coordinates that is understandable to him. Who should be given the highest honors and which office should one try to get into to resolve one’s problems? All these and a multitude of other questions must have precise and clear answers. Otherwise some of the officials would begin running to one office, and some — to the other, and some would actually begin to recreate the customary system with the understandable hierarchy of relations.

If Putin all the same decides to become a strong prime minister under a nominal, weak president, theoretically such a system would provide him with some temporary advantages. The world is familiar with examples of such systems. But given the current Constitution, the consciousness of the present officials might actually become muddled from such an arrangement. And such a situation could end in nothing but a grandiose internal argument. It is very doubtful that Russia has sufficient resources and reserves of political stability to survive such an experiment.

This is quite in accord with my earlier analysis of Putin’s alternatives; most importantly, Konovalov recognizes that the premiership or other non-presidential posts are very poor substitutes for the presidency given the formal powers invested in that office. The immediate implication of this is that Putin must find some way to circumvent the current constitutional ban on a third term.

Konovalov also lays out one of the two competing positions on what is going on in the Kremlin today. The first is that Putin is playing a masterful game of chess: keeping his opponents guessing; raising, then dashing, the hopes of would be successors; pulling surprises; but all according to an overall plan to retain the presidency. The second–the one that Konovalov advocates–is that Putin is riding the tiger. He desperately needs to stay on top; his fortune, power, and perhaps his life, depend on that. But he has no well-considered plan to do so. His ruthless underlings are restless, and jostling for position. He has a preternatural obsession with stability, and knows that one wrong move could plunge the Russian elite–and the nation–into a chaotic war of all against all. So he is extemporizing, experimenting, furiously floating trial balloons, encouraging “grass roots” movements of support, all with the object of finding some way of staying atop the tiger–instead of under its claws.

I do not know which story is correct, but if I had to choose, I’d choose the riding the tiger alternative. Devious Master Plans are the stuff of fiction and movies. Political decisions are usually extemporized in conditions of great uncertainty. Leaders are seldom puppet masters, but are buffeted by events largely outside of their control. Successful leaders are those that are best able to respond to the vicissitudes of circumstance, and keep one step ahead of their rivals.

Regardless of which explanation is correct, the ultimate conclusion is the same; Putin will remain President of Russia, or at least will make every effort to do so. Given that he is likely almost completely unconstrained by any moral scruple, and he has many resources at his command, the odds are in his favor.

5. From an article in the Moscow News (again via JRL 2007-#233), a story about Boris Yeltsin that echoes a theme in my post Mocked By the Fates:

A few years ago, Russia’s ex-president was celebrating his birthday and Alexander Livshits, his former aide on economic issues and Russia’s deputy prime minister in 1996-1997, phoned him to congratulate.

According to Livshits, who later retold the story to journalists, after exchanging niceties the two men engaged in a conversation that, among other things, touched upon Russia’s economy performing amazingly well.

“Well, Alexander Yakovlevich, it isn’t that difficult to do today, with oil prices hovering above $40 a barrel. If we only had that price back in, say, 1995, we could have moved mountains,” Yeltsin lamented.

Well, that’s enough for one night. So much to read–and to write–and so little time.

In the frenzy over (nearly) $100 oil, everybody–be they politicians or spokesmen for supermajors or OPEC–are desperate to deflect blame. OPEC representatives make risible statements that an increase in OPEC output would not cause prices to fall. (Who knew?) Oil industry folks say that fundamentals can’t justify current prices. Politicians bloviate (well, more than usual), mutter darkly about manipulation, and propose various whacked-out policy nostrums. But all agree on one thing: Speculators Are to Blame. Like the Claude Rains character in Casablanca who orders his gendarmes to “round up the usual suspects” after Humphrey Bogart shoots the Gestapo agent in front of his eyes, whenever energy prices spike, the hue and cry goes up to round up the speculators.

Of late, Exhibit A in case against energy speculation is based on the CFTC’s Large Trader Reports. These reports show that long “non-commercial” positions have been increasing along with prices. “Aha!” go the anti-speculators: “See, those speculators are buying, and driving up prices. If we curtail ‘excess’ speculation, we’ll get oil prices back down.”

Err, not exactly. Leaving aside the myriad deficiencies in the large trader reports–they are a very imprecise measure of actual speculative and hedging activity because there is no reliable mapping between “non-commercial” and “speculation” or “commercial” and “hedging” (commercials speculate too, you see)–there is a serious conceptual problem here. Rather than relying on some abstract, academic analysis to try to make this point, I think this problem can be illustrated best with a contrast.

Believe it or not in this age of record nominal gold prices, but in the 1990s and early-2000s, many gold market participants claimed that gold producer hedging–forward sales of gold–was depressing gold prices. Now let’s work through this. If gold hedgers were net short, since derivative contracts are in zero net supply, that means that gold speculators were net long–just like the current situation in oil. And similarly, if oil speculators are net long today, that means that oil hedgers are net short. So riddle me this: how is it possible that a short hedging imbalance caused gold prices to be too low but is causing oil prices to be too high, and how is it possible that a long speculative imbalance is causing oil prices to be too high, but caused gold prices to be too low?

In other words, if I applied the gold bug theory about low gold prices (short hedging imbalance causes prices to be too low) I would conclude that current oil prices are too low, and if I applied the current theory about high oil prices (long speculation causes prices to be too high) I would conclude that gold prices in the 90s were too high. Does this mean that for prices to make Goldilocks happy (i.e., for prices to be “just right”), net hedging is zero and net speculation is zero? Put differently, the same theory can be used to reach the exact opposite conclusions about whether prices are too high or too low; I can use the exact same data on the composition of open interest to support either conclusion depending on my political/rhetorical/economic purposes. In other words, this “theory” provides no practical guidance whatsoever as to whether prices are higher or lower than they “should be.” It is, to be blunt, pure garbage.

The contrast between the gold and oil markets illustrates the pitfalls of overinterpreting accounting identities. Speculative and hedging positions have to add up to zero, and whether one number is positive and the other negative, or vice versa, is of no use in evaluating which is driving prices.

Another article in today’s WSJ on Chinese energy price controls. This article confirms what I had conjectured in earlier posts. Specifically, that (a) price controls are encouraging consumption, but (b) through a combination of cajoling and subsidies, the government has prodded/induced major refiners (notably Sinopec, for whom I’ve taught the last two years) to produced enough refined products to avoid shortages.

Here’s what I infer from the recent developments. This is conjecture, but is consistent with the news coverage I’ve seen. In recent years, government subsidies have been sufficient to induce Chinese refiners, notably Sinopec, to produce sufficient oil to meet demand at the artificially low official price. The continuing increase in the price of oil has made Sinopec uncertain about the credibility of government promises (explicit or implicit) to make good its losses from selling fuels at the artificially low prices, so it has cut back on output, or at least not expanded output sufficiently to keep up with burgeoning demand. This has led to episodes of shortages, lines, etc., which has the government worried. So it is trying to deal with the situation by a mixture of policy tools. It is trying to reduce the excess demand by increasing the official price. At the same time, it is ratcheting up the pressure on Sinopec and other refiners.

This Rube Goldberg approach reflects a problem I mentioned when interviewed about Russian food price controls–once in place, they are very hard to get rid of even as their costs escalate. Politically, the Chinese government feels that it cannot cut the Gordian knot and eliminate the controls. Similarly, it has concerns about the political ramifications of rationing, particularly in rural areas which are already restless and less than enamored with the government. But at the same time rising oil prices make it progressively more expensive to subsidize output of refined products, which puts strain on the budget. So the government is resorting to tried-and-true authoritarian/communist techniques–ratcheting up the pressure on producers. As for one of the expedients, forcing refiners to defer maintenance in order to sustain output in the short run just kicks the can down the road. There will be more refinery outages in the future, putting more pressure on the rickety edifice. And refiners will be very reluctant to invest in new capacity. Someday–perhaps some day soon–the whole thing will come a cropper. And it won’t be pretty.

I am in the process of putting together some back of the envelope calculations regarding the impact of price controls and subsidies in developing nations, like China, on overall market demand, and hence on prices. The basic idea is to determine (a) the elasticity of demand in such countries, (b) total consumption in these countries, and (c) the amount of the subsidy. Given these figures, it will be possible to estimate (at least crudely, no pun intended) how much oil consumption would fall if these countries were to let domestic energy prices rise to meet world prices. Presumably energy demand in such countries is more elastic than in the US or Western Europe, as energy comprises a larger share of expenditures in such countries (even at subsidized prices). Nonetheless, I would wager that price controls (combined with subsidies or other measures like those in China to ensure supplies meet the quantity demanded at the controlled prices) contribute substantially to demand for oil, and hence are contributing to high world oil prices.