Katrina's Link to Increasing Fuel Prices

Just like everywhere else where gas prices have shot up over the past couple of months, I drive around and wait for my moments to pounce. It was a fairly predictable game until this morning. You see, until then, I knew that if I chose my moment, I could probably get away with paying around 93 cents per liter (I live in Toronto), thus avoiding the spikes that would see the price sometimes rise to about $1.03. That ended this morning when I paid $1.26. That's a 25% price hike in one night. I know that this is the whole supply and demand thing, but there has to also be a bit of a Katrina effect.

We've actually been warned about this type of thing before. Consider this from a piece just published in June:

"As evidenced by the increases in global inventory levels of crude oil, current oil output worldwide is more than adequate to meet existing demand. The real problem will come - exclusive of unanticipated and protracted distruptions in supply (read...Hurricane activity in the US Gulf of Mexico...) - later this year, when forecasted demand is projected to exceed the ability of worldwide refining cpabilities to process available crude into useable refined petroleum products."

And we are often reminded about the impact of short-term supply shortages - especially those that can arise in the Gulf of Mexico

Oil production, refinery and pipeline problems can temporarily contribute to higher prices. Last fall’s hurricanes in the Gulf of Mexico significantly curtailed oil production from offshore platforms as well as coastal refinery operations. About one-quarter of Gulf oil production remained out of service for an extended period and several Gulf Coast refineries had to curtail output because of hurricane-related effects as well as scheduled maintenance

Despite the evidence, and the warnings our natural tendency is to proceed thinking that the worst will never happen, and we should just move forward. The fact is, oil from the Gulf of Mexico is becoming a very important source that many energy officials feel represents a tangible way for the US to at least partially insulate itself from the supply-side uncertainties stemming from abroad. The region is recognized as an important area, and the current administration is banking on it:

Since 2001, the administration has continued incentive programs for deepwater areas of the Gulf and introduced new incentives for other areas. The most recent announced by Interior Secretary Gale Norton in January 2004..."The Gulf of Mexico delivers more oil and gas to the US market than any single domestic or foreign source, but many older, easier-to-reach fields have passed their peak. Exploration has shown more gas can be produced at deeper depths under existing shallow-water infrastructure; and oil can be produced at tremendous depths,"

This region is increasingly becoming the main artery of domestically produced oil,

The Gulf of Mexico is home to roughly a quarter of U.S. domestic oil and gas output, with a capacity to produce about 1.5 million barrels per day of crude and 12.3 billion cubic feet per day of gas.

but this morning we found that the two main piplines that supply product from Texas all the way up to the eastern seaboard have become disabled because power outages are disabling the system's pumping ability. In fact 80% of output has been disrupted, which means (if my math is correct), that overall supply has dropped by 20%. The connection to price hikes at the pump are complete, and the overall situation is worsened in some areas that develop a greater than average reliance on fuel

Some of the knottiest issues still to be resolved will be restoring electricity to Gulf Coast pipelines and refineries, which are also suffering from flooding that could very well have left critical electric motors submerged. It will be days before a full assessment of the damage can be done, industry officials and analysts said.

Meantime, wholesale gasoline suppliers have begun limiting the amount of fuel they sell to retailers in certain markets in order to make sure they do not take delivery of more fuel than they actually need.

Now, if I'm an oil supplier to the U.S. from an area that is insulated from the effects of hurricanes and other supply side shocks, no matter how dire the situation has become along the Gulf Coast, this is good news:

Canada's big oil producers enjoyed yet another surge on the Toronto Stock Exchange yesterday, in many cases breaking new record highs as the effects of Hurricane Katrina travel north....Of course, oil producers have become wildly profitable now, with the price of crude oil breaking one record after another. Oil closed yesterday in New York at US$68.94 a barrel, down US87 cents -- but that's the ninth consecutive day it has traded above US$65...At this price, Alberta's oilsands are cash machines and its vast oil reserves attract comparisons to that of Saudi Arabia. As a result, investment dollars are pouring in, making the shares of oil producers appear free from gravity.

Meanwhile back in the Gulf, the effort required for producers to restore some degree stability especially on their oil rigs is no small task, and can only fully be appreciated by looking at the logistics involved:

BP has already started to move small crews to some of its platforms. The crews will restart generators and inspect the facilities for damage prior to bringing them back on line.

On Monday, there were reports of several rigs that had gone adrift. The rigs are often equipped with electronic locator devices so the companies can locate and retrieve them when they come free of their moorings.

For as much as we have been discussing our reliance on fuel and connecting it to the long-term sustainability of our contemporary work culture on the blog, it is really quite scary when the pieces come together and some of the predictions come true. Only time will tell how long this takes, but in the short term at least, we can say goodbye to that little jig we've been playing at the pumps.

Concerns about gasoline price gouging and profiteering following natural disasters are prompting investigations and legislation.