A sobering day today, as we learned that New Orleans and much of the coast had not been spared after all. The waters swept away what many generations had built, and the task of trying to put it back together seems increasingly daunting.
Others are in a better position than I to communicate progress and needs of the relief effort. For those interested in what the economic implications of all this might prove to be, I offer these thoughts.
The storm’s damage to energy infrastructure appears to be significant, with 1.4 million barrels per day of crude oil production shut in, at least 7 drilling rigs adrift and 8 refineries shut down. The latter development was estimated to have idled 1.79 million barrels a day of refining capacity, or 10% of the nation’s total, according to Bloomberg or 2.3 mbd according to the Associated Press. And the damage to infrastructure is substantial enough that it’s hard even to begin the process of repair.
Port Fourchon, Louisiana, the base for three-quarters of
support services to the Gulf’s deepwater oil and gas facilities,
is shut because of the storm, said Port Director Ted Falgout…. “It’s going to be extremely difficult to supply and repair
platforms if the port is closed,” Falgout said. “The nearest
alternative location for logistics is Venice, Louisiana, which
was totally destroyed.”
There is also concern that if deliveries of crude oil through the Louisiana Offshore Oil Port do not resume soon, a number of Midwest refiners would also be forced to curtail operations.
I commented yesterday that the effects on refineries could be of much more economic significance than the loss of crude oil production. Because of the global nature of the market for crude oil, the cumulative reduction in oil use of the millions of barrels of lost Gulf production will be spread out across the globe and across time, reducing the size of the impact on crude oil prices. The same is not true of highly localized gasoline markets. Given the depleted stocks of gasoline inventories, there is little ability to cushion consumers from any further losses in U.S. gasoline production.
Today’s results on the New York Mercantile Exchange provided further confirmation of this. The price of the near-term futures contract for crude rose an additional $2.61 a barrel today, reflecting increased pessimism about the consequences for crude oil production, with the January through March contracts now over $70 a barrel. Gasoline, on the other hand, was up a whopping 41 cents a gallon, which comes on top of yesterday’s 13 cent a gallon hike.
The graph at the right shows the change in the futures price for crude oil or gasoline since last Friday as a function of the term of the contract, reported as a percent of where the price of that contract had been before the storm arrived. Since the futures price might be viewed as the price that traders believe will hold at the maturity date of the contract, the change in price records how the future looks different to the market today compared to perceptions before the storm hit land. Traders evidently believe that the price of crude will be 6% higher in October than it would have been without the damage done by the storm, whereas gasoline prices could be 19% higher. Of the short-run problems that Katrina raises for the U.S. energy market, the refining issue appears to be the significantly greater short-run challenge.
One of the questions I am almost always asked by reporters is, “will the price Americans pay at the pump go even higher?” My stock answer is, “I’m not sure.” But in the present circumstances, having just seen a 55 cent per gallon rise in the price of September gasoline futures, the question is a no-brainer– American consumers are in for a huge shock at the pump within a very short period.
And the next question I get asked is, “will that put the U.S. into a recession?” If it were just the consequences of the storm itself, my answer would have been, “probably not.” The reason is that I think most people would see this as a special event, tragic but thankfully short-lived. But this event did not arrive out of the blue. Instead, it came in an environment in which there was already considerable anxiety about gas prices and sound basis for worrying about a possible recession even if Katrina had done no harm.
Could this be enough to tip the whole economic cart over? I’m not certain that it will. But it would seem foolish to deny the very real possibility that it could.