Petrol, Petrom, and the President

So, President Basescu is unhappy.

This is not unusual. President Basescu is often unhappy. You’d think that, having won the election last December against Prime Minister Nastase, he’d be at least content. But Basescu is a scrapper, and he’s always looking for a fight, and in recent weeks he’s found one. It’s about petrol, and Petrom.

Perhaps I should explain.

This is all happening here in Romania, EU candidate country best known for orphans, gypsies and Dracula. (N.B., this is a grossly unfair image. Romania is a lovely country. But there it is.) But those of you with an economic or historical bent may know that Romania is known for another thing: oil.

Romania’s oil fields kept the Wehrmacht running for most of WWII. Later, they brought a windfall of foreign currency to the corrupt Ceausescu regime. And today… well, today they’re declining. Romania’s production “peak” was hit in the 1980s, and the oil fields have been gradually running dry ever since.

Still, they are producing quite a lot of oil: enough to supply about half of Romania’s domestic needs. This makes Romania the biggest oil producer between the North Sea and the Black Sea. It helps quite a bit with Romania’s trade balance. Better still, Romania has a lot of oil refineries. So, as production tapers off, they can hope to import crude from Russia and the Caucasus (right across the Black Sea), refine it, and re-export it.

In order to do this, though, they have to drastically modernize and upgrade their Communist-era oil industry. All of it: production, pipelines, refineries. And Romania has no money for this. So they’ve been privatizing it, bit by bit.

The single biggest piece of the industry is the state-owned company called Petrom. (Not to be confused with Rompetrol, which is another state-owned oil company that was privatized in 2001. Nor with Petromedia, a refinery, or Petroservices, which is owned by the unions. It’s a post-Communist country, they don’t have a lot of names to go around. Stay focused.) A majority share in Petrom was sold last year for $1.2 billion. The buyer was OMV, the big Austrian energy company. If you’ve ever flown into Vienna airport? You drive into town past this huge complex of tanks and pipes? That’s OMV. Used to be the Austrian state oil company.

Still with me? So, okay, so far so good. OMV starts investing in Petrom. Since it’s a former state-owned company itself, and conservative, it doesn’t start firing people (yet). Production forecasts are up. Infrastructure upgrades have started. Everyone is happy.

Then, the price of oil heads for the goddamn moon.

Enter Romanian President Basescu. Basescu has been President for less than a year. He’s an earthy, feisty man-of-the-people sort. He won by campaigning as a take-charge, can-do reform candidate. And he’s very upset with these oil prices.

Basescu wants to know, why are Romanian consumers paying so much for oil? Aren’t we an oil-producing country? How can this be?

Now, the pat economic answer to this is: world oil prices are high. They’re high everywhere. If Romania tries to mandate lower pump prices, it’ll be sucking money out of its own oil producers (which means, mostly, the recently privatized Petrom). Worse yet, it’ll introduce an artificial price differential between Romania and neighboring countries. If that price differential is significant, then we’ll see an explosion of cross-border petrol smuggling. If this gets big enough, we’ll see shortages, as oil flows away from low prices and towards high. This has happened before; in fact, it’s happening right now, in various places around the world. (Iraq, for instance.) And once you introduce a price subsidy, it’s really frickin hard to get rid of it. (Ecuador, Indonesia.)

Also, you can’t force Petrom — a private company — to sell oil to Romanians for $1 per liter instead of to Hungarians and Austrians and Germans for $1.50 per liter. (Or whatever.)

To this the President responds, basically: are you nuts? We privatized Petrom in order to modernize our oil industry, assuming world oil prices around $45 a barrel. Now it’s around $60 a barrel. But the modernization isn’t going faster or better. Rather, Petrom’s shareholders — those Austrians — are getting a huge cash windfall. While the Romanian consumer suffers, and Romania’s economy is going to lose some growth, and inflation may come creeping back, because of high oil prices.

And, dammit, we’re an oil producing country. It’s just insane that we’re suffering as badly as the Moldovans and Bulgarians, who don’t have a drop to their name.

Unfortunately, the President keeps foundering on that last point: that Petrom is a private company now. He’s tried various things, up to and including threatening Petrom with audits and other sorts of state harassment. But the Austrians, after giving a bit of ground — they cut prices a little — have decided to stand their groud. They’re a private firm, they’re fulfilling all the provisions of the privatization agreement. When they tbought Petrom, they ook the risk of a fall in oil prices. It’s not their fault if random chance sent oil prices this way instead of that. And the Romanian state can’t tell them what to do.

Basescu is very unhappy. Partly this is because he hates to see a problem he can’t come to grips with. Partly also, it’s because at heart he’s still a Communist. Prices should be fixable! And when push comes to shove, nobody should be able to defy the State!

But he can’t mess with the country’s biggest privatization without totally destroying Romania’s credibility as an investment destination. So Romanians are paying almost the same as Bulgarians, oil producing country or not.

And there, for the moment, the matter rests.

(But a hypothetical question for the economists. What if Petrom pushed oil prices somewhat lower — say, to 10% or 15% less than the regional price? That wouldn’t cause smuggling and shortages… nobody’s going to run tankers across the border to save 20 cents a liter. But it would give some relief to the Romanian consumer. Would this be bad in some other way?)

7 thoughts on “Petrol, Petrom, and the President

  1. Pingback: Halfway down the Danube

  2. Aaaargh! Subsidising oil use – TYR no stand it – BAD MEDICINE!

    —calms down—

    Far better idea: Slap a windfall excess-profits tax on the infuriating Austrian fatbacks. They can’t disinvest because of the existing refineries and reserves..and they’re still coining it.

  3. It sounds to me like the romanians are heading into something like what the US ran into in the 1880s; but Teddy Roosevelt Basescu isn’t.

  4. Another point would be to pressure OMV to upgrade the refining capabilities faster & better than they have been. After all, they’ve got all that cash floating around…

  5. Another point would be to pressure OMV to upgrade the refining capabilities faster & better than they have been.

    It is very obviously in their interest to increase capacity. They’ll do it anyway, as much as is practical.

    nobody’s going to run tankers across the border to save 20 cents a liter.

    Of course they would. Assuming 10000 liters in a tank truck, that is 2000 Euros. And for less in savings it is not worth tarnishing Romania’s image.

  6. If you take a good look at Petrobras in Brasil and at Sonangol in Angola you’ll see the effects you mention happen everywhere, the main difference being that while Brasil managed to keep real control of it’s own oil Angola ended up giving away most of it’s profit. Nevertheless, and just the same way it happens also in Venezuela, the common citizen doesn’t profit from the fact that his country is an oil producer.

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