Interesting discussion on oil and gas, courtesy of James D. Hamilton at the Econbrowser. Thanks, James!
Effects of Hurricane Ike on oil and gas markets
As Hurricane Ike took over the Gulf of Mexico, I watched with unusual interest, since I had been scheduled to fly through Houston to give a lecture in Baton Rouge on Friday. We had to cancel that visit to LSU, which left me to contemplate the consequences of Hurricane Ike for oil and gas markets from the comfort of my warm, snug home in San Diego.
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Essentially all of the 1.3 million barrels per day of U.S. crude oil production from the Gulf of Mexico (which accounts for about a quarter of total U.S. production) has been shut in as a result of the storm. When the same thing happened 3 years ago with Hurricane Katrina, the effects turned out to be surprisingly long-lived. Damage to offshore rigs proved costly to repair, and in some cases due to field depletion the platforms were abandoned rather than repaired. We will have to wait for an assessment of how extensive the damage will be this time around. The absence of a significant spike up in oil prices at the end of last week suggests that many market participants were not so worried this time.
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The other concern is refining capacity. Texas and Louisiana do about half of the nation’s refining, and Bloomberg reports that 20% of the nation’s refining capacity was shut down by the storm. That again is comparable to what we saw 3 years ago with Katrina, in which again several of the damaged refineries took some time to repair. Damage to refineries this time may be less serious than originally feared. But even if there is no damage, it could still take a week or two to restart the refineries, and before Ike gasoline inventories were quite low.
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But there’s another factor in the mix this time as well. Governors and attorneys general in Tennessee, Florida, Missouri, North Carolina and doubtless many other states announced plans to crack down on "price gouging." In the current political and legal environment, fears of prosecution for this "crime" will surely prevent the price from rising to the point at which supply equals demand. That means we should expect to see shortages.
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But shortages and fears of a return to higher prices are additional motivations for people to buy gas when and where they can. If the governor orders prices to stay put, that provides a powerful reason for everyone to fill up their tanks now. And the surge in demand from that source can be an even bigger shock to the system than the supply outages themselves. Via Instapundit, Knoxnews.com reports:
As for fuel availability, Pilot hasn’t run out at any of its stores, but is struggling to make sure supplies remain constant. A fuel shipment from Colonial Pipeline’s main trunk into Knoxville that was originally slated to arrive Saturday, then was postponed until Tuesday, has now been pushed back to Thursday, [Pilot’s vice president for supply and distribution Alan] Wright said.
The problem now is not just less fuel coming from the refineries, but a run on the pumps by drivers, he said.
"The fuel situation for Pilot really hasn’t changed a whole lot since yesterday. We have fuel right now and we continue to deliver fuel to our stores; the problem we have is we are selling about twice as much fuel as we normally would," he said.
Wright said he anticipated there will be more spikes in fuel prices and short supplies over the next two to three weeks after Ike hits.
Pilot isn’t the only local gasoline retailer watching the fuel situation deteriorate.
"I’ve been in this business 50 years and this has never happened before," said Bill Weigel, head of the Weigel’s chain of convenience stores in Knox, Blount, Sevier, Loudon, Anderson and Monroe counties.
Weigel, who said Thursday that about a half-dozen Weigel’s stores had run out of gas, declined to say how many more stores had run dry Friday.
Gee, and I had been all ready to share the good news that the drop in gasoline prices prior to Ike seemed to produce a remarkable bump back up in consumer sentiment.
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