While it is much more important today to focus on the plight of the affected populations – to evacuate those that still need it, and to help those that have lost everything, it is also becoming clearer eache day that the impact of Katrina on the economy of the USA will be major, and that its international impact will also be very real.
Below the fold:
- oil
- refining capacity and gasoline
- electricity supply
- natural gas and power prices
- ports
- wheat
- other economic indicators
- some unexpected geopolitical ramifications
Oil
From the (federal) Mineral Management Service (press release for Wednesday)
Today’s shut-in oil production is 1,371,814 BOPD. This shut-in oil production is equivalent to 91.45% of the daily oil production in the GOM, which is currently approximately 1.5 million BOPD.
Today’s shut-in gas production is 8.345 BCFPD. This shut-in gas production is equivalent to 83.46% of the daily gas production in the GOM, which is currently approximately 10 BCFPD.
This thread over at the oil drum (report from an anonymous insider ) which has been featured in earlier diaries provides some scary information on the status of the offshore platforms has now been partly confirmed by the Coast Guard which confirms that at least 20 platforms are missing (out of more than 700).
The big worry is that a lot of the underwater and onshore pipelines and facilities have been damaged.
It is likely that several hundred thoudand barrels per day will be missing for a long time. In the current streched world market, this is a significant volume gone missing at the worst time (fourth quarter in traditionally the period with the highest worldwide demand for oil).
Refining capacity
From the Dept. of Energy‘s most recent update on the situation (5 page pdf): (click on picture for bigger version)
So at least 1.8 mb/d of capacity is currently closed, and close to 3 mb/d are under “reduced runs”, so not operating at full capacity, either due to power outages, lack of access to oil from pipeline closures or other causes. Hopefully this will come back on stream fairly quickly.
The FT reports that some of the producers have already started to ration fuel:
Refiners ration oil as they assess damage
The loss of contact with personnel underlined the depth of problems facing the nine US refineries shut down in the wake of the storm that on Monday swept through America’s energy heartland, shutting down 10 per cent of US refining capacity.
Valero said one of its refineries would be down for up to two weeks. Others were unclear how long it would take to restart operations that had been flooded with several feet of water, damaged in places and lost electricity. As a result, rationing by some refiners has already begun. Chevron, the second biggest oil and gas company in the US, was the first to reveal it was rationing petrol to buyers across the south-east of the country.
The pipelines that fed those areas were closed, said Michael Barrett, Chevron spokesman. “There is no way to get product up there.” The loss of power to two big pipelines that moved products out of the area had shut them down.
Mr Barrett explained that stations that had monthly contracts with Chevron could still get petrol, but they could only take a 1/30 of their allotment per day.
Some of this may be panic or bubble-like behavior:
US refinery industry caught out by hurricane disruption
The rise in oil prices to $70 a barrel after Hurricane Katrina swept through the Gulf of Mexico has highlighted the fact that the US refinery industry is unable to handle short-term supply disruptions.
The hurricane has shut nine refineries with a combined capacity of 2m barrels per day, or about 12.5 per cent of US refining capacity. It has also shut 1.4m b/d of crude oil production, or about 90 per cent, of the US Gulf of Mexico output, and 88 per cent of the region’s natural gas.
With US refineries near capacity and the amount of oil output lost equal to the world’s spare oil production capacity, the industry is vulnerable to price spikes because there are few options to overcome a significant supply disruption.
The 33 per cent rise in US petrol futures this week to a record $2.90 a gallon, which equates to a remarkable $121.80 a barrel, was the key driver behind the oil price rally to record levels. As refiners see their petrol-making margins rise above an eye-catching $50 a barrel, traders have pushed crude oil prices higher to get a slice of the bonanza.
Electricity
The situation is dire in the region, with more than 2.2 million people without power:
(From the same Dept. of Energy‘s update, which has more detailed information State by State and utility by utility.)
Some areas will be without power for a while, as poles are down, and equipment is under water. Crews are converging from the rest of the country to reestablsih services.
Natural gas and power prices
This has been somewhat neglected in the discussions about oil, but natural gas production has been interrupted as well (as indicated above), and this has had a bigger impact on natural gas prices than on oil prices, as shown in the graph below: prices jumped by more than 25% from an already high level.
Now this is important because natural gas prices effectively determine electricity prices, with a lag. Coal fired and nuclear plants are cheaper, but they are online pretty much all the time and the price for electricity is determined by the price for additional capacity, which comes today almost exclusively from gas-fired plants (low cost producers will get a windfall, but that’s another story).
A lot of gas-fired plants have been built in the past 15 years, and the general expectation was for gas-prices in the 2-4 $/mbtu range (that made prices similar to that of coal-fired plants). Now that gas costs 3-4 times more, power prices are set to increase by 50-100%. It won’t happen overnight, as there are long term supply contracts in place and regulated tariffs, but it will trickle through in the coming months (unless regulators block retial prices, in which case utilites will be squeezed between higher wholesale prices and lower retail prices, triggering a new Californaia-like crisis).
This is the real sleeper story for next year.
Ports
The South Louisiana Port is the largest in the Us and the 5th largest in the world and it has been impacted by hte hurricane, to an extent unclear at this point. With personnel missing, access roads made difficult, US trade for large swathes of the region could be made more difficult.
The LOOP (Lousiana Offshore Oil Port), the biggest oil import facility and the only one able to receive supertankers was shut down on Sunday and is slowly starting to reopn. But as I pointed out in diary yesterday, the port is only accessible by only one road which appears to be closed. That will make it difficult to return to normal activity, even if tankers can be downloaded and the oil sent off by pipeline, as seems to be the case already.
Wheat
One sector where the closure of the port facilities will have an impact is on wheat. This comes at the peak time for US whaet exports, and it comes in a market where poor crops in other countries have led to a smallish worldwide shortage for the year. Delays or reduction in US exports could have a major impact on prices for the commodity. and guess who the major importers are? China and the Middle East.
Economic indicators
FT
energy costs were 7 per cent of household income in 1960, 9 per cent in 1980 during the second oil crisis, and about 4 per cent last year. (…) petrol, power and natural gas prices had doubled since last summer, and were taking a larger share of household spending.
So, with today’s prices, gasoline and energy are already as expensive to US consumers that they were at the worst of the 1979-80 crisis.
Flurry of bad signals for US economy
Wall Street was unsettled yesterday by deepening investor fears over the US economy and high oil prices. These worries were starkly highlighted by a series of negative signals – the start of an inversion of the US Treasury yield curve, the biggest-ever monthly decline in an index of manufacturing activity from the Chicago area and a downward revision of US growth in the second quarter.
(…)
The Chicago purchasing managers index – a barometer of business activity in the midwest – came in at 49.2 for August, the lowest level since April 2003. The level was far below economists’ expectations of 61.5 and July’s reading of 63.5. A reading below 50 indicates contraction.
(…)
“The combination of a yield curve starting to invert and high oil prices sends a strong message to investors that the US economy is set to slow,” said Anthony Crescenzi, chief bond market strategist at Miller Tabak, a brokerage.
GlobalInsight provides some scenarios here. The best case sees 60-75$ oil, 2.50-3$ gasoline ans slower growth. The worst case sees 70-100$ oil, 3,50$ gasoline and zero growth for the rest of the year.
International considerations
The FT notes that :
The US has no emergency reserves of petrol while commercial reserves are near a two-year low and dwindling by the day as refiners are unable to replenish their storage tanks.
This is where Europe, the second player in this tug of war, comes into the fray. The EU stipulates that countries must also hold reserves, not only of oil but of petrol. There are 52m barrels of petrol reserves worldwide, most of them in Germany, France, Italy and Spain. But whether it is politically feasible for Europe to send the US petrol while Europe’s own prices are at record highs is unclear.
The first signs are not promising. Wolfgang Clement, Germany’s economy minister, yesterday implied the petrol shortages in the US were at least in part its own fault.
Whether the US would want to accept such aid is also far from certain.
Relations with Europe could sour on this pretty quickly. The article also notes that relations with Saudi Arabia, the other player in that game, will not be simple either.
Menawhile, Indonesia has to grapple with the consequences of its policy of subsidising gasoline for its population. At current prices, the subsidies will cost the central budget 14 billion dollars, or a third of its total spending. The Indonesian currency has seen a run agaisnt it as this is seen as unsutainable – but reducing subsidies and increasing prices threatens riots…
Altogether, the extent of the damage is not fully known, but is likely to be major, and may appear in the most unexpected places. The economic impact of the total devastation of a whole region is unknown; the impact of higher oil and gasoline prices, and later of power prices, on US consumption will be significant and could trigger the long feared bursting of the housing bubble.
