Dangerous demagoguery

Sep 28, 2005 02:00 AM

by Jack Rafuse

It's no secret that Hurricane Katrina did awful damage to the Gulf Coast region and the US energy infrastructure in the Gulf. A lesser known casualty of the storm has been the thinking of many politicians and pundits. Some of them are now calling for destructive economic policies such as price controls and time-wasting initiatives such as investigations into allegations of profiteering.
Let's review some of the facts surrounding Katrina and energy prices to understand what's happened and what we should be doing -- and not doing -- in response.

In the year before the Katrina hit, gasoline prices rose $ 0.50 per gallon, and politicians and reporters remained calm. They knew the rise was due to many factors, including booming Chinese, Indian and world-wide demand; lack of excess production capacity; rising US crude oil inventories; US refineries running at peak capacity; uncertainty about Iran, Iraq and Venezuela; high US summer demand; and other causes. But there was no "crisis." Logic and calm prevailed.
Then the storm smashed the US energy infrastructure as badly as it damaged cities, homes and lives.

Consider the following facts, available at www.eia.doe.gov

The US uses 21.3 mm 42-gallon barrels of oil a day (21.3 mm bpd);
The US uses 11 mm bpd of the 21.3 as gasoline.
The US produces 5.5 mm bpd (1.6 mm bpd from thousands of platforms in the Gulf of Mexico).
Katrina shut down hundreds of platforms and cut 0.9 mm bpd of supply -- 60 % of Gulf Offshore production.
Many damaged platforms are now producing; it will be weeks before all are at full capacity.
The oil moves through undersea pipelines to Gulf Coast refineries; other pipelines distribute crude oil and petroleum product around the country.
Some pipelines were damaged and must be repaired.

US refining capacity is 17.0 mm bpd; 8.1 mm bpd (47.4 %) in the Gulf Coast Region.
Katrina left six refineries damaged, flooded and without electricity. Four are now running; two (5 % of US refining capacity) will be out for several weeks.
The US imports 10.8 mm bpd of crude oil (refined products make up the difference.)
The Louisiana Offshore Oil Port (LOOP) which brings in 0.9 mm bpd was evacuated and shut down as Katrina neared.
Another 2.6 mm bpd that comes through Gulf Coast ports was cut off completely for about a week.
It will be weeks before those facilities can move pre-Katrina volumes; repairs will cost hundreds of millions of dollars.

So at the height of the summer driving season, Katrina shut down platforms producing one-sixth of US domestic oil production; and LOOP, which throughputs 30 % of US oil imports. She damaged handling facilities and refineries that process almost one-half of our domestic and foreign oil; and the tank farms and pipelines that move most of that oil and gasoline to the US Northeast and Midwest.
This damage compounded the "non-crisis" causes. The result was that the world price of crude oil topped $ 70 per barrel for a short while. The US average price of gasoline hit $ 3.05 by September 1 -- up $ 0.70 from August 1 and $ 1.20 from year-earlier levels (although as facilities come on, prices have begun to drop).

Politicians and journalists who understood and explained earlier gasoline price hikes totalling $ 0.50 suddenly found it incomprehensible that anything could increase prices by another $ 0.70. They saw no connection among Katrina, the damage, supply cut-offs and the price increase.
They knew that prices rose since 2004 because of supply and demand in a world market; they should figure out that losing 16 % of US crude oil production could cut US and world crude oil supply and raise prices.
They knew that US refineries had been at full capacity for years; they should figure out that damage to, and shutdown of, six major refineries could make a big difference in US gasoline supply -- and US gasoline prices.

They knew that the US imports more than half of all the oil that Americans use; they should figure out that closing LOOP and losing 8.5 % of US crude oil imports would make a difference in total US crude oil supply. And they should figure out that damage to onshore petroleum receiving facilities in New Orleans, Biloxi, Mobile and other major Gulf ports could make a huge difference to total US supply, as could damage to the pipelines that move crude oil and product around the country.
Finally, they should figure out that each of those things has some impact on costs to consumers; the combined impact is inescapably large.

But critics apparently see no connection between damage, shortages and price increases, so they want "solutions." Senator Maria Cantwell (D-WA) wants the Federal Trade Commission to investigate so-called "price gouging." Senator Byron Dorgan (D-ND) is introducing a bill to tax energy companies' profits. The state of Hawaii has already instituted price controls on energy and other states are considering similar measures.
The politicians' desire to do (or say) something prevails over logic and information. The proposals are a disservice to the nation. Americans would understand the issues if they were explained, as was the case for the price changes the year before Katrina.

President Bush used the Strategic Petroleum Reserve to ease supply pressures. He proposes to site refineries, nuclear plants and Liquefied Natural Gas plants on closed military bases. That could speed permits, diversify energy sources and cut down on "Not In My Back Yard" arguments. Senator George Allen (R-VA) wants to suspend gasoline regulations to eliminate "boutique" fuels. That could introduce efficiencies into the worst supply bottlenecks.
Neither proposal will satisfy critics who call for non-solutions and blame those who disagree. They want the spotlight, not answers. That's pandering, not policy.

Jack Rafuse is a consultant on domestic and international energy, security and trade issues.

Source: Petroleumworld
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