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The Return of the Bad Old Days

12:00 AM, Jun 21, 2014 • By IRWIN M. STELZER
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All of this means that barring a complete shutdown of Iraq’s industry, there is a rough demand-supply balance, the maintenance of which is in the hands of the Saudis and U.S. drillers. But the risks of a shortfall in the near- medium-term have increased, and with it the risk of higher fuel and gasoline prices that might damage recoveries here and throw the even more fragile euro economies into recession. There are already signs of pressure here on gasoline prices as the driving season begins.

Meanwhile, the markets for the products of crude oil are in turmoil. Although law here prohibits exports of domestic crude, it allows exports of refined products. American refiners have had two recent blessings. First, there is a glut of fracked oil not easily useable in U.S. refineries, and therefor available to refiners at favorable prices. Second, our refineries run on relatively cheap natural gas (another result of fracking). So the oil products they turn out have a price advantage in world markets. Which enables them to send what the trade press calls “a tidal wave” of gasoline, diesel and other refined products to Europe and elsewhere. Which is one reason BP has signed a deal with Kinder Morgan for 80 percent of the capacity of a new Texas refinery that will process U.S. crude just enough to call the output “products,” legally available for export.

As always, sudden change in oil markets has geopolitical as well as economic effects.

·     The administration believes it is in our interests to allow Iran to increase crude sales so as to hold oil prices down and prevent a further slowing of our economic recovery, and to encourage the mullahs to provide military aid to Iraq, and so is accelerating the exploration of common interests with our long-time foe.

·     Any threat of an oil shortage inevitably weakens Israel’s standing with consuming countries, ever-willing to blame any problem on Israel, and increases Saudi clout.

·     Higher oil prices strengthen Russia’s economy.

Then there is the as-yet remote possibility of a complete ISIS takeover of Iraq’s oil fields—that would give the militants control over the price of oil and the fate of Western economies.

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