The Sunday Times: Well of despair: Hurricane Katrina has devastated US oil production, bringing fuel shortages, soaring prices and raising the spectre of a global energy crisis: Sunday 4 September 2005
Report by Dominic Rushe in New York, Dan Box and David Smith
On Friday Mark Bradshaw reluctantly called in engineers to update his petrol pumps. The owner of a small independent petrol station in Quatt, Shropshire, his four pumps go up to only 99.99p a litre for petrol. Designed when the idea of £1 a litre seemed impossible, they cannot cope with higher figures.
But after Hurricane Katrina’s devastating sweep through the Gulf coast last week, Bradshaw learnt that his supplier was ramping up the cost of wholesale petrol by 7p a litre. That is enough to drive the price paid by his customers above £1.
Updating his machines will cost about £300 per pump, but he has no choice. “If I had a delivery today it would cost me 98.6p a litre, and that’s before I put any profit or running costs or staff wages on that,” Bradsaw said. “The price we charge will have to go up now, it can’t not.”
Since 2001, the average price of unleaded petrol on British forecourts has risen from less than 70p a litre to a record 92.2p — before the latest increases come through. The average price of diesel has gone up to 95.8p a litre.
As a result, some of Britain’s biggest petrol retailers, including the oil giants BP and Shell, will also upgrade their pumps.
In the past few weeks the retailers have been meeting Tokheim, one of the country’s leading petrol pump producers, to discuss upgrading equipment to handle £1 per litre. Up to 70% of pumps on 10,000 petrol forecourts could be obsolete. Most will need their software updated; others may have to be replaced.
The price of oil traded on the benchmark New York Mercantile Exchange has soared in the past year. Hurricane Katrina, which tore through the Gulf of Mexico, where much of the US oil industry is based, caused the price to hit a record intra-day high of $70.85 a barrel, another setback for Britain’s beleaguered retailers.
Jonathan Loynes, chief UK economist at Capital Economics, a consultancy, said: “As if there were not enough for consumers to cope with, higher petrol prices are another blow.”
With inflation set to rise further, the Bank of England is unlikely to offer early relief by cutting interest rates.
IN AMERICA, a full-blown petrol crisis is under way, with queues at filling stations hundreds of miles from hurricane-affected areas. This summer’s “driving season” comes to an end this weekend with motorists facing record prices of more than $3 a gallon, up by nearly 50% since the spring.
Experts say prices are likely to rise further. Michael Carey, New York-based economist at Calyon, a investment bank, predicts $3.50 or more, lasting for weeks, and having a big impact on consumer confidence and the economy. “The damage to the energy infrastructure, where little or no spare capacity exists, is the principal reason we believe the economic impact could be severe,” he said.
President Bush, who after the 9/11 attacks on New York and Washington urged motorists to carry on driving to keep the economy going, had a different message last week. He took the unusual step of urging Americans not to buy petrol if they don’t have to. “Americans should be prudent in their use of energy,” he said. “Don’t buy gas if you don’t need it.”
Last Thursday the International Energy Agency announced it would release 60m barrels of oil resrves to alleviate the crisis in America. This is the first time it has done so since the 1991 Gulf war.
And Jay Fakes, head of the Federal Energy Information Administration from 1993 to 2000, said: “In terms of the scale and impact on the American market, this is comparable to the oil embargo of 1973 and 1974.”
Analysts have begun to speak openly about an energy crisis for the first time. Kevin Norrish, a commodities analyst at Barclays Capital, said: “It is now appropriate to talk of a major energy crisis after Hurricane Katrina pushed US energy markets beyond the edge.
“The refining system was already having difficulty producing enough gasoline, and inventories had already fallen to a 21-month low. In short, the numbers will not balance unless there is some significant demand destruction.”
But American demand, if anything, seems to be growing. Such a crisis could be devastating — and not just in America. Seth Kleinman, oil analyst at Washington-based consultants PFC Energy, said: “It’s no exaggeration to say Katrina could prompt a global recession.”
KATRINA’s deadly sweep across the Gulf of Mexico is thought to have killed thousands of people, caused up to $35 billion in insured losses — and at least half as much again in uninsured damage — and disrupted one of America’s greatest oil sources. Prices have remained stubbornly high since May last year, when they burst through $40 a barrel for the first time since the oil shock of 1979.
Ever since, prices have been pushed up by increasing demand, particularly in the rapidly developing economies of China and India, and by fear of terrorism and instability in the big oil-producing nations.
A volatile mix of fear and rising demand have kept prices high. Increased consumption in America as well as the rise of China and India, the war in Iraq, Iran’s nuclear dispute with the West, the succession in the Saudi royal family, America’s increasingly difficult relations with Venezuela — all have kept the price of a barrel of oil at or above $60 in recent months. Now, in addition to the intangibles of world politics, the markets have been trying to assess the reality of Katrina. In the short term, the outlook is bleak.
About 1,100 oil platforms were exposed to the full force of the hurricane. BP said nine of its platforms had been toppled or damaged, accounting for about 2,000 barrels of oil production a day. One of its distribution terminals was also damaged.
In total, Katrina closed down about 91% of daily crude production and 83% of natural gas production in the Gulf. The region accounts for about a quarter of US oil and gas production. And, while some supplies were beginning to return to normal, a long-term loss of output appears inevitable.
Eight Gulf oil refineries are closed, with a further five operating at a reduced rate, said the US Department of Energy. Those refineries were processing 1.8m barrels of oil a day — more than 10% of the 16.5m barrels handled by American refiners. They could take months to restart.
Last week’s US petrol-price surge to more than $3 a gallon in some areas was accompanied by an air of desperation. Shortages were reported across America — in Charlotte, North Carolina, 15% of stations were empty. Despite Bush’s plea, panicked drivers queued, hoping to fill up before further rises.
Prices are expected to pass $3.25 this weekend as motorists struggle to get home at the end of the holiday season. In early 2004, crude oil was $36 a barrel and retail prices climbed to $1.59 a gallon.
For British motorists paying more than £4 a gallon, the rise may seem irrelevant. But in America, cheap gas is seen almost as a birthright. America consumes 160 billion gallons of motor fuel a year. Consumers are a key driver of economic growth. If they cut spending to pay for rising fuel, the consequences for the American and world economy could be dire.
America’s domestic refining industry has been operating at, or near, capacity for several years. Since 1980, the number of refineries has shrunk from 320, with the capacity to refine 18.6m barrels of crude every day, to only 150, with a capacity of 16.5m barrels. At the same time, US consumption of motor fuel has increased from 115 billion gallons a year to more than 160 billion gallons.
How long will these high prices for oil and petrol last? In the past the answer was simple: something had to give. Either prices would fall independently or they would weaken economic growth, cutting demand and eventually prices. This time, high oil prices have had little impact on growth in the two countries where consumption has been rising fastest — America and China. Even so, many experts believe prices cannot be maintained at these levels for long.
“We are looking at a bubble,” said Ken Goldstein, economist at the Conference Board think tank. “I’m not in any way trying to minimise the damage (caused by the hurricane). But if you look at the numbers, they suggest we are going to be okay.”
He calculates the oil shortfall in the next two or three months will be close to 150m barrels. Last week Bush opened up the strategic reserve, the US government’s oil cache. “That holds about 700m barrels of oil so, even if the damage is three times worse than we suspect, we’ll be okay,” he said.
Goldstein said the full extent of the flooding and damage was unknown and the picture could change. “But with oil at $65-$70 a barrel the idea that we are going to reach $80 or $90 is overstating the case.” He points to the gloomy prognostications after Hurricane Andrew and 9/11. “We saw a two or three-month dip followed by a rebuilding effort that reversed it.”
But blaming rising prices on “bubble speculation” and predicting plummeting prices a year from now cut no ice with Kleinman at PFC. This weekend he is working on a new price forecast. His old one was $75; the new price will be higher. Goldman Sachs continues to predict a possible “superspike” in prices, which could hit $105 a barrel.
With pump prices soaring and signs of a slowing housing market, will free-spending Americans shut their wallets?
Kleinman believes that US consumers will carry on buying petrol, and gas-guzzling cars, even if prices continue to rise past $4 a gallon. “But if it does, will consumers buy a $4 latte at Starbucks?” And, faced with £1 a litre petrol, will their British counterparts go on strike too?
AN ECONOMIC EARTHQUAKE
NEARLY a century ago, when the 1906 earthquake wrecked San Francisco, the economic impact was both significant and far-reaching: estimates suggest an immediate hit to America’s gross domestic product of between 1.5% and 1.8%.
The second-round effects were even bigger. Most of the insured losses were borne by Lloyd’s of London. To meet them, gold had to be transferred from Britain to America — which led to a rise in UK interest rates.
The Bank of England also responded by discriminating against US money-market bills, prompting a full-blown American financial crisis and recession in 1907.
More recent natural disasters have had a limited economic impact. In 1992, Hurricane Andrew caused $26 billion of damage ($34 billion in today’s prices), mainly in Florida, but it did not significantly affect a recovering US economy. In general, the damage and loss of activity was quickly balanced by the positive impact of repair and reconstruction work. This was also true after the man-made disaster of 9/11.
The difference in Katrina’s case is oil. By hitting production and refining capacity it has pushed up an already high oil price, lifted petrol prices and led to shortages. And there is the damage — estimates of its total cost range from $40 billion to $100 billion. Insured losses could be as high as $35 billion.
‘The increase in gasoline (petrol) prices is likely to hurt consumer confidence and squeeze spending on non-energy goods and services,’ said Sara Aronchick and Andrew Tilton of Goldman Sachs. ‘Consumers will have to spend more to get the same quantity of energy products, causing them to curtail spending on other items.’
Goldman Sachs estimates that for the next four weeks petrol production in America will be reduced by 1m barrels a day, roughly 10% of demand. This could lead to more ‘demand rationing’ — queues — last seen in 1979. That could undermine consumer confidence.
The key to whether Alan Greenspan and the Federal Reserve think the economic impact is serious will be whether the next rise in interest rates, scheduled for September 20, is postponed.
Click here to return to ShellNews.net HOME PAGE