Hurricane Katrina could have a much bigger effect on the price of gasoline and natural gas than on the price of crude oil. Here’s why.
As the day began, there were worries that the roof of the New Orleans Superdome might blow off and that the price of crude oil could go into the sky with it. Fortunately, the storm hit land farther east and with a bit less force than originally feared, leaving the Superdome disfigured but structurally sound. In New York, oil prices sunk from their $70/barrel opening price to end the day at $67.20, up just a little over a dollar a barrel for the day.
Bloomberg reported that 1.4 million barrels of oil production and 8.3 billion cubic feet of natural gas production from the Gulf of Mexico are being lost each day. Some of this should be back up quickly, though not, for example, the drilling platform that showed up stuck under a bridge of Highway 98. We might use the estimate of
Kinetic Analysis Corporation/University of Central Florida that a quarter of the lost production (hat tip: the Oil Drum) will be out for more than a month.
Some analysts have compared these production figures with total U.S. crude production, but that is certainly not the correct comparison. The reason is that it is a world market for oil. Regardless of what happens in the Gulf of Mexico, oil will sell for essentially the same price in New York as in Rotterdam. Because lost crude oil production currently appears to be a relatively modest component of global supply, the net impact on the price of crude was unimpressive. Even so, I was surprised that the increase turned out to be so small, if the production figures cited above prove to be accurate.
Natural gas and gasoline are very different stories, however. Natural gas is largely a domestic market, and the price of an October natural gas contract on the New York Mercantile Exchange shot up 14% today. And although gasoline could be an international market, for the United States, it isn’t. In fact, it’s not even a national market, given the fact that Americans can be required by law to purchase a different kind of gasoline on a county-by-county basis; (see the map below and discussion of its significance here). Because the market for gasoline is so local, the disruption of the output of even a single refinery can have a big effect.
The hurricane has substantial potential to disrupt deliveries of crude oil that are needed by particular refineries. Bloomberg reports:
The Louisiana Offshore Oil Port, the biggest U.S. oil import terminal, stopped making pipeline shipments to refineries from its onshore facilities.
The port is 20 miles off the coast and handles about 1 million barrels of crude oil a day, or 11 percent of U.S. imports
Several Louisiana refineries are also themselves directly affected.
Lawrence J. Goldstein of the Petroleum Industry Research Foundation estimates that total refinery production of gasoline, heating oil, diesel and other fuels could fall by as much as 20 million barrels over the next 60 days. Contracts for September and October delivery of unleaded gasoline rose today by 13 cents and 11 cents a gallon, respectively, on the New York Mercantile Exchange today.
These of course come on top of an already strained national refining system. A fire last week at a San Francisco Bay Area refinery and possibility of a second refinery shutdown sent the California spot gasoline price up 13 cents a gallon even before Katrina threatened New Orleans.
Perhaps it’s time to ask again whether Americans really want to keep all those different colors on the map below.
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Do the states regulate this? One could argue that states should be free to define their own standards. E.g. if their are good environmental arguments for creating particular fuel types in certain areas, e.g. cities, it would be a shame to force those not in the cities to adhere to those requirements. But then again, economies of scale would argue that a consistent standards across the country would make more sense.
Isn’t this the typical American approach. No standards. A free for all. Let the market decide? In this case, the market would be state regulatory bodies, I guess.
For those interested in an in-depth view of the situation in New Orleans, see the following:
http://tinyurl.com/akt2t
An interview with the mayor of New Orleans.
Some of the gasoline standards are federally mandated (like RFG and low-RVP), some are state-mandated (like oxyfuels in Minnesota, or Cal and AZ-CBG).
Federal RFG is a strange beast in that it is a mix of performance standards (i.e., “reduce SO2 output to 75% of 1990 levels”) and technology standards (e.g., “must be 2.7% oxygen by weight”). This is a bad system.
It can be argued that RFG has been successful in reducing ground-level ozone concentrations in urban areas, which is generally speaking a good thing. Likewise, the low-RVP requirements keep a lot of evaporated hydrocarbons out of the air.
If I was gasoline czar, I’d get rid of all oxy-fuels requirements, including the oxygen content rule in the RFG specification, and get rid of the dumb ethanol-based oxyfuel requirements in MN, IL, CO, and so on.
At the end of the day, though, we’re still left with different gasolines for urban and rural areas, and I’m pretty sure the rural folks wouldn’t want more expensive urban gasoline specifications forced upon them. The patchwork quilt is here to stay. The least that can be done is to reduce the number of colours, but it will remain a quilt.
Crude oil inventories are above normal (as mentioned in the previous post) whereas gasoline inventories are at the bottom of the normal range for this time of year.
So the loss of crude production can be absorbed by just drawing down inventories to the normal range (in the short term). But the loss of refining capacity has no simple solution and I expect a spike in gasoline prices.
Best Wishes (thanks for the better map!)
Como o governo ajuda a aumentar o potencial destrutivo de Katrina
Incentivos importam. E incentivos que não são gerados pela própria atividade dos interessados são mais difíceis de se auto-sustentarem em um mundo complexo. Um exemplo? O furacão Katrina. Nos EUA, por determinação do Estado (aparentemente por p…
If Katrina caused or will cause a spike in gasoline prices, why have January ’06 futures risen so much in the past 24 hours?
see here for the prices:
http://futures.tradingcharts.com/marketquotes/index.php3?market=CL
How long is the “spike” expected to last??
Evaluating Katrina’s damage to oil and gas production facilities
Officials of oil and gas companies and refineries with facilities in the path of Hurricane Katrina were scurrying around yesterday somewhat helplessly attempting to evaluate the extent of the storm’s damage on key oil and natural-gas production facilit…
Econoclast, the Jan 2006 unleaded gasoline contract was up 6 cents a gallon on Monday, compared to a 13 cents a gallon increase in the September 2005 contract. Are these the numbers you are referring to?
These diverse regional standards are often discussed as one of the primary barriers to developing the refinery sector in the US.
If this were true, wouldn’t you expect a much greater price differential between regions. For example, it seems like a part of Arizona, purple on the map, has its own specification that no one else shares.
Additionally, if the process involved in producing this specification is elaborate, one would expect that competition would be reduced and if one of the refineries producing for this region were to go off line, prices could shoot up. One would further expect that some people in these reguions would try to buy gas outside of the regions.
It seems to me that since ths is not happening on a large level, perhaps the state mandated specifications are easier to meet then it seems. If it is just a question of an additive, maybe the difference is not that great.
Jack, the California spot price went up 13 cents a gallon just this last week because of disruptions at one or two refineries. And try driving from Utah to California and tell me that you don’t see any differences in gasoline prices across communities.
Just in case this has not been discussed yet here: NYMEX has declared force majeure as gas cannot be delivered to the Henry Hub terminal, which was shut in because of Katrina. As I read it, that means for that for the preseent moment, gas sellers shall not held to be in default on futures contracts if buyers are not receiving gas due them under contracts expiring in Auguest It would seem that an exchange arbitration panel will rule on the settlement of such claims. See below.
NEW YORK, N.Y., August 29, 2004 The delivery committee of the New York Mercantile Exchange, Inc., convened this morning to review deliveries in progress related to the NYMEX Division natural gas futures contract for August 2005. Based upon the shutdown and force majeure declaration by the Sabine Pipeline, which operates the Henry Hub facility in Louisiana, all remaining delivery obligations in the August contract month are operating under force majeure considerations subject to NYMEX rule 220.18.
The committee is currently in contact with Sabine regarding handling of any outstanding delivery obligations as expressly prescribed in NYMEX rule 220.18, section (C)(6). All market participants with any outstanding August 2005 natural gas futures obligations will be advised of any further decisions by the committee. All parties have available now, as always, the ability to mutually agree to execute an ADP pursuant to NYMEX rule 220.17A for the August 2005 delivery obligations. Further, the committee will be considering any appropriate decisions and actions pursuant to the rules regarding any upcoming obligations in the September 2005 natural gas futures as conditions at the Henry Hub are evaluated
[edited by JDH to reduce length]
In evaluating the impact of Katrina, and the prices for oil and gas you should recognize some specific characteristics of the potential supply interruption. Storm based shutdowns of Gulf production facilities are a relatively routine matter at this time of year and are an expected part of operations. Damage to the pumping platforms and the lines are of a somewhat longer term nature and may have a greater impact on near term production. However, differences in crude production can be supplemented by re-direction of tankers, and by draw downs of the Strategic Oil Reserve.
No matter where the crude comes from, we must pass it through the refineries, and refinery capacity in the U S is marginal to begin with. Refinery damage may create a paradox where crude is readily available, but with limited refinery capacity gasoline, diesel and other fuels are in exceedingly short supply.
While this could create a temporary price spike, the word “temporary” is the important issue. When crude availability is interupted by political instability the period of time that the interuptions will last are extremely unpredictable. While getting the work force reassembled, and the securing of needed parts will take some effort, most of the refiners will have reasonably reliable projections of the restorations of operations within the week.
Jack,
Eventhough there are all these different specs for gasoline, they are still relatively similar to each other. After all they are all refined from crude and you can drive your car across all 50 states without worrying about damage to your car. That is why the differences in price are not that large. At least that is when things are working smoothly.
The different spec requires blending of difference grades of clean products to achieve the desired level of vapor pressure (that is what the RVP number refers to) plus any oxy additives. While this is no rocket science, it can not be done on the fly. Plus there is no incentive to stock inventory for markets you normally don’t serve. So when there is a supply disruption, depending on how tight is the supply chain and how difficult it is to subsitute product from another market, there can be a short term spike in price for a given local market. California has experience a few of them in the last few years.
We are very tight on gasoline inventory and a few refineries were knock out by the storm. So spot prices are up to reflect current lower supply. The rest of the forward curve moves up is to reflect the need to rebuild inventory to a more comfortable level. Had the forward curve stay constant while the spot price spike up, people would have the (wrong) incentive to draw down the inventory even further and cover it with futures. So prices rise across the whole strip to balance the spot supply and demand, as well as supply and demand acorss term. That is exactly the way futures market is supposed to work.
NOTES OF A HURRICANE WONK
Once upon a time I worked for the Federal government and who knows, I may again some day. You can look at the evolving disaster in the Southeast and think politics, or think civil service. In the latter mode, a…
One should keep an eye out for natural gas price movements. Last week it broke $10.00/mmBTU; yesterday it was over $11!
We’re filling storage these days for the winter heating season plus almost all the new electrical generation built in the last 15 years has been natural gas-fueled so electricity prices will be increasing. With only 3% of our natural gas usage coming from imported liquefied natural gas (LNG), expect the pressure to build for new importation terminals.
Henry Hub is back online.
“A potential crisis in the natural-gas markets was apparently averted Monday after the company operating the Henry Hub gas gathering facility said it avoided major damage from Hurricane Katrina and reopened the site for delivery and receipt.”
http://www.marketwatch.com/news/story.asp?guid=%7B2F2C8737%2DB1ED%2D469E%2DAFBB%2D06B6452A0A49%7D&siteid=mktw&dist=
A local just sent me this (I can’t verify – time estimates are his):
“… the Murphy Oil, Conoco Phillips and Chalmette refining installations (in Chalmette) will be off line for at least 3 months(if not [longer]) based on the flooding and damage in that area….those 3 facilities ain’t coming back anytime soon. That’s 550,000bpd that’s gonna be missing, not counting Pascagoua (which I’m sure also took a tremendous hit).”
Unleaded Gasoline OCT just hit $2.11.
Katrina’s long-term economic impact on gasoline and natural gas prices
Econbrowser has an interesting article yesterday on potential long-term economic impacts of Katrina on gasoline and natural gas prices.
The Katrina disaster ain’t over
Not by a long shot. As I mentioned yesterday, the winds may have died down but the real disaster will be water:
GULFPORT, Miss. (AP) – Rescuers in boats and helicopters searched for survivors of Hurricane Katrina and brought victims, wet and bedragg…
Prof. Hamilton on Katrina & Oil & Gasoline Prices
Prof. Hamilton has a very long post that looks at the impact of hurricane Katrina on gasoline, natural gas, and oil prices. First off, Prof. Hamilton was surprised at the change in oil price (about a $1),
Some analysts have compared these productio…
Will the media ever learn basic economics (natural disaster department)
The situation in New Orleans and throughout LA, MS, and AL is indeed grim. As of last report, the water is still rising in New Orleans due to the breaks in the levee. It was disconcerting last night to see…
“Perhaps it’s time to ask again whether Americans really want to keep all those different colors on the map below.”
JDH’s truly stunning response to a terrible, terrible human tragedy: “Let’s use the couple dimes worth of supply-driven price shock to argue for deregulation of the gasoline industry (who cares if kids get cancer)”
That’s what this whole thing amounts to to JDH.
After a couple months of reading this blog, I’ve come to regard it as a frightening example of how devastatingly heartless academics can be.
Interesting points, Roger. I write about the implications of the storm for energy supply not because it is the only aspect that I think is important, but because that is where I have some expertise and where I may have something different to say from what others have already said.
If you were getting your news from a conventional source such as a newspaper or TV news show, I have no doubt that it would be covering the hurricane story from a variety of angles. The way to use the web is to look different places to get those different perspectives. You, the consumer of web information, should try to receive a variety of perspectives by visiting a number of different websites, not by expecting any one website to cover everything or say everything.
Here you will find the economic analysis presented in an objective, factual manner. I try to lay out what the policy options and likely outcomes might be. If that’s not the only way you want to evaluate these events, then this should not be the only website you visit.
The claim that the proliferation of fuel standards would only cost “a few dimes” is something that a reasonable person might have believed ten years ago. I would say that it has proven to be a false conjecture, and am giving you evidence that it is a false conjecture.
We could likewise discuss the probable public health consequences of having fewer colors on the map on the basis of a rational investigation of the evidence. I categorically disagree with the assessment that it is “heartless” to try to identify the costs and the benefits of this or any other policy.
Roger, I understand your feelings, but I come to this site for an economic perspective and I’m sure that is exactly what most of Dr. Hamilton’s readers expect. We are very lucky to have the Professor’s expertise available.
Writing about the economic impact in no way diminshes the horrible human tragedy – my heart goes out to all the victims of the hurricane.
Best Wishes to you.
James, thank you for your thoughtful response.
I have people in the area I can’t contact so I’m quite emotional at the moment.
I certainly take your points and I’m certain there are a variety of inefficiencies in the gasoline standards that act against our economic interest.
I guess I just find it genuinely stunning that of all the myriad possible reactions — economic or otherwise — , to this situation, that what you would find most important to talk about is to argue for deregulation.
Not that you’re not arguably right, and I would certainly agree that heartless detachment occasionally, even often, serves the progress of knowledge.
It’s just amazing to me to witness this particular reaction to this particular set of circumstances.
Let me add one more fact, Roger. At the time that I wrote this post, there was no known loss of life. I could see where if you heard today’s news first and then read this post (which I wrote yesterday), many people might have the reaction that you did. I and many others did not recognize the magnitude of the human side of this trauma until today.
I wish you the best of luck with contacting your loved ones.
Roger: Think of it this way. On the news we see interviews with people whose homes are completely gone. And yes, we’ve seen worse. Lives lost. And a city largely underwater. But those people who lost their homes. Many of them are sorting through the pieces, looking for something of value. They’ve started the process of putting their lives back together.
Similarly, JDH is looking at an issue which is highly pertinent to the tragedy in New Orleans and is also logically consistent with the previous discussions here. And in particular, the difficulties that the country may face almost immediately in supplying adequate fuel to those different colors also has human impact in terms of costs, the economy, etc.
Therefore, although I understand your point, I think in the present case the issue is pertinent and–similar to those people culling through the detritus of their homes–life must go on.
On the different fuels thing… it isn’t that difficult to make the different fuels if they are BLENDs… that is mixing additives with a generic gasoline blend that can be used anywhere. This kind of regional tailoring does NOT cause refineries a lot of problems as long as the blending can be done ‘off line’… in tanks not directly on stream. This is how diesel is ‘winterized’ in places that maybe 100 degrees in summer and then 40 degrees below in winter… like where I live. They add stuff to keep it from turning into wax when the weather turns cold.
It is also how a lot of the ethanol blends are made… while the ethanol itself adds ‘cost’ since it is generally more expensive to produce… it doesn’t bog down the refineries one bit… the blending is all done off stream and sometimes even off site.
However if the special formulations are actualy altered distillate mixtures… not a blend but made by running the refinery ‘differently’… then it is a HUGE hassle to have many seperate blends.
Then of course there is the possibility of BOTH… taking one of these altered formulations produced by running the refinery ‘differently’ and then blending it in addition… even more of a hassle then either of the above two. Some of the reduced vapor pressure ethanol blends are in this camp… they can’t just use generic gasoline because the addition of ethanol increase the vapor pressure significantly.
So we would need to look at each of those ‘colors’ on that map seperately and how they are produced before we knew which ones were real problems and which were minor inconveniences.
Hope this helps.
Thank you for your kind wishes. We’re hoping it’s a simple loss of cell service. The battery backups on the towers failed hours ago. However looking at the video of the hundreds of homes that now show nothing but rooves leads one to imagine the worst.
The situation is just beyond understanding.
My own deep best wishes to anyone here who is also involved.
Prof. Hamilton on Katrina & Oil & Gasoline Prices
Note: I posted this at Outside the Beltway earlier today, but thought some readers here might like to see it as well. Prof. Hamilton has a very long post that looks at the impact of hurricane Katrina on gasoline, natural gas, and oil prices. First off,…
Good news regarding the gasoline issue, from Green Car Congress:
http://www.greencarcongress.com/2005/08/epa_grants_emer.html
“The EPA is granting an emergency waiver of clean fuel standards in Alabama, Florida, Louisiana and Mississippi because the impact of Hurricane Katrina ‘will prevent the distribution of an adequate supply of fuel to consumers that is compliant with the Clean Air Act.’
“The EPA is temporarily allowing refiners, importers, distributors, carriers and retail outlets (regulated parties) to supply gasoline meeting a Reid Vapor Pressure (RVP) standard of 9.0 psi in areas of the affected states where a lower RVP is required.
…
“Under normal circumstances at this time of year, the metropolitan and high-ozone areas of Louisiana and Florida are required to use gasoline with an RVP of 7.8. Alabama high-ozone areas (including Birmingham) are required to use gasoline with an RVP of 7.0. All other areas in those statesand the entire state of Mississippiare to use gasoline with an RVP of 9.0.
“Further, because of the expected shortage of motor vehicle diesel fuel meeting the 500 parts per million (ppm) sulfur standard, EPA will temporarily allow regulated parties to supply motor vehicle diesel fuel to affected states having a sulfur content greater than 500 ppm.”
That last point will allow referies to use some of the high sulfur “sour” crude which is more widely available, and perhaps eliminate some bottlenecks and help the refineries to run at full capacity.
The requirement to supply “oxygenated” fuels has always annoyed me. It delivers decernably lower milage because it has less energy content.
Think about it this way. Your engine ultimately oyxgenates the hydrocarbons too by mixing with air and burning the mixture. Oyxgenated fuel is just partially PRE-BURNED motor fuel.
I understand the reasoning – the lower heat content lowers combustion temperatures and reduces NOX formation. All for pre-catalyst lightoff reductions. Still, it’s an inelegant fix and one with hidden costs, both in fuel with less punch per buck, and in supply complexities. I, for one, doubt that the pollution reductions are worth the price.
The EPA has now expanded the waiver to cover all 50 states, http://www.epa.gov/katrina/index.html#aug31johnson
Europe Does It’s Bit
Apart from the human tragedy dimension, events which are unfolding in and around New Orleans will have an economic impact which in a globalised world can ripple through each and every economy. Fears that gasoline shortages could produce a recession…
Katrina’s Impact on the Economy
I’m posting links to a few articles and blogs that are taking Katrina’s economic impact into consideration: Daniel Yergin (bio) The Katrina Crisis (Wall Street Journal- subscription required) LEX: Hurricane Damage (Financial Times – subscription requir…
Are you sure no one wants them in their backyard?
You may have heard some claim a lack of refining capacity is driving up fuel costs. They usually mention in the same breath that . Recently there has been a temporarily spike in gas prices due to limited refining capacity…
I like this site very much!
Midwest Gas Price Investigation – Investigation Likely To Continue For At Least Three to Four More Months
The Federal Trade Commission (FTC) issued an interim report to Congress on its investigation into Midwest gas price increases that was cited at the reasons that the FTC launched the investigation. It also provides a status report on the continuing investigation, including progress and a description of the work not yet done. The report details the history of the price spikes of reformulated gasoline (RFG) in the Midwestern part of the country and how these increases caused Commission staff to initiate a preliminary investigation in June and prompted the Commission to begin a formal investigation during the latter part of July.
The report analyzes many conditions reported as potential causes of the gas price spikes – ranging from higher than normal crude oil prices, to the expectation of compliance with EPA Phase II regulations for summer-blend reformulated gasoline in high-ozone urban areas, to the damage to the critically important Explorer pipeline during March. However, the report says that “although it is likely that each of these supply factors contributed to the dramatic recent price spikes in the Midwest, no single factor appears from staff’s preliminary investigation to be likely to provide a full explanation, and staff does not yet have sufficient information to assess the impact of these factors in combination.”
In accordance with the report, Commission staff is investigating “the possibility of collusion or tacit coordination, conduct that could be illegal under Section 5 of the Federal Trade Commission Act.” Due to the abundance of potential interwoven causes as well as the monstrous amount of evidential information being collected for the course of the investigation, the report also states that “this investigation is likely to consume, at a minimum, another three or four months.”
The report shows that on June 29, Commission staff issued the first round of subpoenas to the nine refiners that currently supply the Midwestern markets and that within the month, staff has accepted and logged approximately 200 boxes of documentation. Around mid August, most documents requested from the first round of subpoenas will be delivered to the Commission offices.
The Commission also issued a second round of subpoenas to other refiners last week, and has issued Civil Investigative Demands (CIDs) to the refiners recently, requesting that the refiners compile data and answers to all of the Commissions written questions. Commission staff issued another set of subpoenas on July 25 to the entities that own or control the gas transportation pipelines serving the Midwest markets of the United States. Documents from that set of subpoenas are expected to begin arriving shortly at Commission offices.
The report further details the Commission?s plan to conduct a series of in depth interviews as part of the investigation. Staff has already conducted nearly 15 interviews with market participants, consumers, corporate consumers and many others with knowledge of investigation relevant information, and continues the process of capturing pertinent industry-wide data from the Oil Price Information Service (OPIS). After the documentary evidence has been reviewed and analyzed, staff will take depositions under oath of key participating personnel throughout the gasoline distribution chain in the Midwest United States.
Federal Trade Commission staff will also coordinate all of the investigative efforts with the Attorney General of Michigan, Ohio, Wisconsin, Illinois, Iowa, Minnesota, Kentucky, South Dakota, Indiana, Missouri, and West Virginia.
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