Crude oil and gasoline prices driven even higher by hurricane

Hurricane Katrina's devastating blow to US Gulf Coast energy operations sent petroleum prices soaring yesterday, with analysts saying crude prices could hit US$80 a barrel and pump prices in the US headed well above $3 a gallon. Motorists across North America can expect gasoline pump prices will quickly reflect the hurricane's impact, while users of natural gas and home heating oil will also be hit with rising costs. Oil eased from record highs above $70 on Wednesday after the US offered to loan crude to replace output lost when Katrina ripped through the Gulf of Mexico. But energy experts, warning of a supply shock on the scale of the 1970s, said a two-year bull run that took oil to $70.85 on Tuesday may not have run its course. Prices may yet rebound since the loan of crude from the strategic stockpile will do little to ease a US refining crunch. "Crude is not the problem," said Deborah White, senior energy analyst at SG Commodities. "The heart of the problem is how much refining capacity we have lost." OPEC and its biggest producer, Saudi Arabia, were quick to say they would sell more crude to restrain prices, but buyers said extra heavy, hard-to-process Saudi oil would not ease the shortage of high-quality consumer fuels driving prices.

Katrina, on the way to becoming the costliest storm in US history, shut down refineries along the Gulf of Mexico and halted 95% of oil production in the region. In addition to causing a dramatic rise in oil prices, it's expected that Katrina could cost the insurance industry up to US$25 billion in claims. Early scrambling to assess the storm's aftermath transfixed traders Tuesday, sending crude prices up $2.61 a barrel to a record close of $69.81. Natural gas, meanwhile, kept on its own record-setting course, climbing 52 cents per million BTU to $11.66. Energy economist James Williams of WTRG Economics said the price of gasoline is pushing up the price of crude, rather than the other way around. Crude inventories are in good shape but gasoline is at a historic low end of its reserve range, Williams said. "Enough refineries have been taken out of commission that we may test some of these historic lows," he said. The price increase for gas contracts was three times as great as it was for crude oil on Tuesday. "This market right now is so sensitive world-wide. And frankly had this hurricane not come there is no reason for it. Pre-hurricane, almost everything world-wide was in better shape than a year ago and oil prices were still $20 higher," he said.

The US Energy Department reported that nine Gulf Coast refineries were shut down - representing 10% of US refining capacity - while 90% of the region's oil production and 80% of its natural gas output were down. The Gulf Coast accounts for 26% of oil production in the continental US, while its damaged ports are a major terminal for imported crude. Larry Goldstein, president of the Petroleum Industry Research Foundation, said it was too early to give an accurate assessment of the damage, or how long facilities will be closed. But he said energy traders are expecting the worst, and are particularly nervous because the hurricane season has just begun. Last year, the southeastern US was hit by four category three or four storms in August and September. “The markets don't wait for assessments - they have to anticipate,” Goldstein said. “When you don't have any cushions of spare capacity and you get a surprise, it gets instantaneously priced and that's going to pass right through” to the retail level. And at least seven oil drilling rigs were adrift in the Gulf of Mexico Tuesday. "There's the potential for some environmental impact," Coast Guard spokesman Lieut. Rob Wyman said. "We are trying to keep tabs on them."

Meanwhile, as Katrina plowed through the Mississippi River basin, shutting down ports, flooding cities and cutting power lines, economists warned that it was likely to leave a deeper mark on the national economy than previous hurricanes because of its profound disruption to the area's complex energy supply network. "The typical pattern with a natural disaster like this is that the regional economy gets clobbered but you can barely see it in the national statistics," said Nariman Behravesh, chief economist at Global Insight. "This time it is very different because of the impact on the energy infrastructure." The resulting impact on US consumer spending could reduce growth in the final quarter to about an annualized 2%, from his previous forecast of more than 3%. It is clear that much of the economic activity in the gulf region has been clobbered. New Orleans, home to nearly a million people, is under water. By yesterday morning an estimated 2.7M residents in Alabama, Florida, Louisiana and Mississippi had reported power failures, with many expected to be without electricity for weeks. Conventional and mobile telephone service along the Gulf Coast suffered from severe disruptions. Casinos were destroyed in Mississippi and New Orleans; tourism is not expected to revive for months. Retail chains also suffered. Wal-Mart said 123 of its stores were closed with many damaged. Other retail outlets such as Family Dollar Stores, Home Depot, Lowe's and Sears will also feel some of the effects as consumer spending drops off. Grain shipments also face serious delay: Bunge evacuated a huge soybean operation in Destrehan, LA, its main US export terminal. Food exports and imports that normally flow in huge quantities through regional ports, roads and rail lines are likely to face major disruptions for weeks, if not longer. Economic activity is expected to resume in the next few days and weeks in all but the worst-hit locations. Total economic losses could go as high as US$35B, said Peter Zeihan, a senior analyst at consultancy Stratfor. "The big question is how much the rivers and ports have been silted up. It could be fixed in two days; it could be two months. If it's the longer end, we're going right into the grain harvest. The US is the biggest grain exporter in the world, and most of those exports go down the Mississippi. So food and feed prices could soar worldwide." Imports of oil and all sorts of other goods would be affected, he added, predicting price hikes for a wide range of items. Global trade in a range of other goods and commodities, including grain, cotton, soy, steel, fertilizer and ore, will also be affected.
(New York Times, Vancouver Sun, Calgary Herald, Globe and Mail, National Post, Reuters, CBC 050831)