by Calculated Risk on 10/05/2005 06:50:00 PM

The Financial Times reports: High fuel prices to persist says US energy chief:

Higher energy costs triggered by Hurricanes Katrina and Rita could persist for several years, leaving reduced consumption as the only short-term relief, Samuel Bodman, the US energy secretary, warned on Wednesday.

"Both oil and natural gas availability has been severely impaired and the effects of this will reverberate through the economy of this country for some time," he told a breakfast meeting of reporters. "The main thing that US citizens can do is conserve. We simply have to do it." He predicted conservation efforts would make "a major dent" in demand.

The problem is twofold: In the short run there is a lack of refining capacity because 12 refineries are still shut down in the Gulf Coast area, and in the intermediate run, there is significant damage to oil producing facilities in the Gulf of Mexico. From the Energy Information Administration on refineries:

"...there are 4 refineries still shut down in the New Orleans area following Hurricane Katrina, 7 shut down in the Port Arthur and Lake Charles areas, and 1 shut down or attempting to restart in the Houston/Texas City/Galveston refining area, amounting to a total of over 3.0 million barrels per day of refining capacity that is currently offline. This accounts for over 1.3 million barrels per day of gasoline, over 700,000 barrels per day of distillate fuel, and nearly 400,000 barrels per day of jet fuel that is not being produced as long as these refineries remain shutdown."

Click on graph for larger image.

In the short run, the supply of gasoline and other refined products is critically important. The graph from the DOE shows that gasoline stocks are near the bottom of the normal range and falling. This despite record imports of refined products, as reported in the Financial Times:

US petrol imports last week hit a record 1.4m barrels a day, the Energy Information Administration said on Wednesday.

Once again the financial media is confused on the oil and gasoline supply and demand dynamics. The AP is reporting:

"The price of oil fell to its lowest level in two months on Wednesday as evidence builds that the high cost of gasoline and other fuels is sapping demand."

The AP report is incorrect. The price of oil is falling because the demand for oil is falling. The demand for oil is falling because the 12 refineries are shut down.

This graph compares the 2004 and 2005 demand for gasoline for each week from the beginning of June. For 2005, the demand for gasoline was strong even with the much higher price, until hurricane Katrina struck the Gulf Coast. When prices spiked to over $3 per gallon, demand fell sharply. But demand is now just below the same period in 2004. Note: weekly demand can vary considerably.


So in the short run, there will continue to be upward pressure on the prices of refined products. In the intermediate term, when the refineries are restored to full operation, there will be pressure on oil prices - if the economy stays reasonably healthy.

Therefore it is not unexpected to see oil prices fall - and they may fall some more. However there is a danger of much higher gasoline prices (and heating oil prices) if demand stays strong.

In the long run, the policy of encouraging oil consumption and relying on ever more oil production is probably doomed. The Financial Times touches on that topic:

"The US has not measurably increased fuel efficiency standards for vehicles in a generation and so we now lag behind China in these standards," said Paul Bledsoe of the National Commission on Energy Policy, a bipartisan body comprising industry executives and former policymakers.

RESOURCES:
Here is the current Hurricane Katrina/Hurricane Rita Evacuation and Production Shut-in Statistics Report from the Minerals Management Service.

And here is the Energy Information Administration's daily report.

And the Department of Energy's This Week in Petroleum.