TURKMENISTAN - The Long-Term Problems.

There has been no major investment in oil refining capacity in the US and Europe for many years, and lack of adequate investment in Asian/Pacific oil refining since a financial crisis hit Asia in late 1997. There are capacity shortages in maritime oil shipping, commercial storage, pipelines and other logistics.

The primary reason for this set of problems is uncertainty among oil refiners, mainly in the US and Europe, caused by continuously evolving environmental regulations and fuel specifications. In the US, the markets for land transportation fuels have been stratified by the emergence of almost 20 different types of reformulated gasoline (RFG) imposed by various states, to the extent that a shortage of RFG in one state cannot be met by a surplus in another.

This particular problem in the US has been exacerbated by the widespread use of sports utility vehicles (SUVs) and various types of vans. Despite high RFG prices in the past two years, people insist on using their SUVs and boats. It is said the number of SUVs on the road in the US has risen to the extent that experts anticipate it to shortly exceed the number of smaller personal cars.

Non-OPEC producers have been pumping oil at maximum capacity since late 2002, when strikes in Venezuela caused its oil supplies to be halted for more than two months. All capacity increases in non-OPEC countries have been fully used. OPEC now is producing 30m b/d, its highest level since 1979/80, and only Saudi Arabia has some spare capacity left which is the only margin of safety in the world. With the kingdom producing 9.5m b/d, Saudi Oil Minister Ali Al-Naimi last week said his country still had 1.5m b/d of spare capacity and pledged to use it within weeks. If and when Saudi Arabia's actual output reaches 11m b/d, there will be no more capacity to resort to on either side of Suez.

However, most of OPEC's production involves grades of crude oil ranging from medium to heavy/sour. These crude oils are no longer as popular - in some cases no longer acceptable - as they used to be in the 1970s and early 1980s.

A shift to lighter and sweeter crudes in the US and Europe, and to some extent in Asia and the rest of the world, has occurred since the late 1970s with the coming on stream of major oilfields in the North Sea and other parts of the northern hemisphere. This shift has accelerated since the early 1980s, partly as a result of rapid increase in the rate of oil discoveries in the North Sea and other non-OPEC areas, and partly due to environmental policies and new fuel specifications imposed in the richer world.

As most refineries in the US, Europe and to a lesser extent Asia have been configured and/or modified to process light/sweet crude oils, demand for heavy/sour grades has declined. Most of the growth in demand in these regions - a growth since 1999 having been far more rapid than anticipated, with the exception of a stagnant period from 9/11 to mid-2002 - has been for light/sweet grades.

By contrast, worldwide capacity to produce light/sweet grades has been shrinking steadily since the OECD boom years of the 1990s. As a result, the premium of light/sweet WTI over the price of heavy/sour grades produced in the Persian Gulf on Sept. 28 was more than $15/b. The market value of OPEC's basket of seven crude oils, which include light/sweet grades, this week was $43/b.

Supply of natural gas in the US has been acutely short of demand. The situation on the European gas market is tight, with Russia importing natural gas from Turkmenistan to meet a shortage in its own domestic market (see Gas Market Trends).

There are shortages in electric power generation in the US, Europe, Latin America, Asia, Africa and the Middle East. The shortages were underlined in the US and West Europe by power cuts in August and September 2003.

Because they are structural, these long-term problems require massive investment. No such investment is apparent in the US, Europe, Asia and elsewhere at present as the world is uncertain about the prospects after the US presidential elections, due on Nov. 2. If the Democrat candidate, Sen. John Kerry, wins over George W. Bush, the uncertainty could drag on at least for another year.