Thursday, May 12, 2011

Putin's Got Gas (Problems)

If Barack Obama were thinking of heeding the call of Donald Trump (and others) to order gas prices down, he needs to look no further than Russia, where Russian Prime Minister Vladimir Putin has become a one-man gas crisis, to see what a colossally-bad idea that is. Russia has been facing widespread gasoline shortages, with two dozen regions reporting serious shortages and some places in Siberia running dry for awhile, all apparently thanks to Putin's efforts to wrest control of the nation's gasoline prices away from the open market.

Russia's problems started a few months ago when Putin signed a decree raising the taxes on gasoline in Russia. Of course Russians didn't like the increase at the pump and with presidential elections less than a year away, Putin felt a need to polish his populist credentials. Putin being Putin though, his solution was in February to simply order Russia's gas companies to lower their prices to make up for the rise caused by the new taxes. But the gas companies soon realized that they were getting the short end of the deal and that they could make far more profit by exporting gas to Europe rather than selling it at a loss or near loss at home, so they began to divert shipments from Russian gasoline stations to wholesalers in Europe. Soon stations across the country were experiencing shortages, with some in the Altai Region of Siberia where half of the gas stations ran completely dry.

This caused even more anger among Russia's driving public, so last week Putin stepped in again, this time “suggesting” that Russian oil companies halt gasoline exports for the month of May to put more product into the distribution system at home, state-run firms Rosneft and Gazprom, the giants of the Russian petroleum sector, soon complied, easing the shortages.

But one has to wonder if this is just kicking the can down the road a bit, since once June rolls around and the May moratorium ends, companies will still see the same profit in selling gas abroad (though Putin also ordered a raise in gasoline export taxes to cut into these profits). The reality is that gasoline prices are a function of market forces largely beyond government control. It is a good lesson for Putin, Trump and anyone else who thinks they can just “order” fuel prices around to learn.
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