Running Low on Gas

Myths surrounding the present shortage of motor fuels in Russia are proliferating like Ladas queuing at a Rostov gasoline station. Some say the shortages are a politically inspired plot to bring down the government, others argue they have been engineered to create conditions for the president to introduce a state of emergency and suspend the Constitution.

When it comes to conspiracy theories in Russia, you pay your money and take your choice. But there is no doubt that motor fuel shortages are a matter of utmost political concern. Along with the price of staple foodstuffs and alcohol, the cost of gasoline and diesel is perceived as one of the few issues that could provoke serious social unrest among long-suffering Russian consumers.

The level of government concern could be gauged by Prime Minister Sergei Stepashin's emergency meeting with oil company chiefs last week in an attempt to thrash out some kind of solution.

But details that have emerged so far indicate measures that could if not actually worsen the situation, certainly do little to improve it. And the reason for this appears to be a somewhat hazy understanding of the reasons for the gasoline drought.

The standard explanation is that soaring world prices for crude oil and refined products over the past few months have drawn Russia's hydrocarbon output abroad in increased quantities, leaving little behind for domestic consumers of motor fuels.

But the data does not really bear this theory out. Although crude exports have hit record levels in 1999, over the first six months of the year shipments abroad are roughly on a par with 1998 at around 2.25 million barrels per day. Some sources show they are even slightly lower. Exports of oil products have indeed increased by an impressive 16 percent in the first six months of 1999, but this is arguably onlyrecovering ground that was lost last year when foreign shipments dipped.

In any case, the key thing here is that any increase in refined product exports is not accounted for by gasoline. Russia exports relatively little gasoline because its refineries can produce relatively little fuel that can meet tight European Union quality specifications.

But there is substantial demand in Europe and beyond for heavier products like fuel oil, or mazut: the gunky stuff left behind when crude oil is run through a refinery's distillation unit. This can be re-refined at advanced European plants to produce more high-value gasoline and light products. And fuel oil is especially popular at times such as now, when crude oil is expensive. Fuel oil prices have shot up to around $100 per ton from around $40 per ton earlier in the year. Russian gas oil is also popular, either for re-refining or for use as heating oil.

Sensing demand for these lower quality, but higher value products, refiners have simply increased fuel oil and gas oil output at the expense of gasoline.

So while refinery output actually increased by some 4 percent in the first half of the year, output of gasoline has declined. The gasoline yield from a ton of crude fell from 15.5 percent last year to 13 percent in April. That might not seem like a lot, but it translates into a year-on-year decline in gasoline production of around 14 percent to 1,722 tons.

It has simply not been worthwhile in recent months for refiners to produce motor fuels for the domestic market. And the government really only has itself to blame for all of this. Since devaluation last August, domestic product prices have remained astoundingly low, with 95-octane gasoline retailing at less than 20 cents per liter.

The fact that devaluation coincided with a period of very low international prices meant the cost of domestic fuel did not come under pressure until this spring. The government's response to the first signs that prices would rise was to impose semi-voluntary price controls on the major oil companies and refiners in June. And the result has predictably been Soviet-style shortages.

The fact that the worst affected regions are former Soviet republics like Ukraine, Moldova, Armenia and peripheral Russia regions like the south and the Far East is simply a function of their proximity to refineries, and hence distribution networks, and their ability to pay for fuel. But there is little doubt that the harvest and driving season combined could see shortages intensify and price pressures mount.

The outcome of last Thursday's meeting with the oil barons is not encouraging. Essentially the two sides reached a gentleman's agreement under which the oil companies will be issued with a monthly "plan" for deliveries of oil products to the domestic market. The consequences if they disobey have not been spelled out. The government also seeks to exert greater control over exports by forcing customs registration at the refinery gate, rather than at the border.

But like the attempt at price controls, such administrative measures are likely to be torn apart by the laws of supply and demand.

Traders say that shipping refined oil products abroad will continue to be more attractive than domestic sales until the profit attained from the respective operations converges to within $5 per ton. Allowing prices to steadily rise to a level approaching those in Europe can be the only way out of Russia's gasoline drought.

Yet in an election year, the government is more likely to consider that a substantial hike in the cost of fuel may be a political price that is simply too high to pay.

Euan Craik is Moscow bureau chief for Petroleum Argus. He contributed this comment to The Moscow Times.