Why This Matters: Katrina and Peak Oil
Posted by Prof. Goose on August 29, 2005 - 5:43pm
Why? Because Katrina will have disrupted Gulf production, refining, and storage of petroleum for an uncertain amount of time. We have probably lost at least 1mbpd of production, if not more, for a significant period of time. We use 20mbpd in the US. That means either the US cuts consumption by at least five percent or demand will push prices upwards, and dramatically.
You see, with supply and demand balanced on a knife's edge as it is because of "peak oil," this scenario could lead to huge amounts of volatilty in the oil markets for weeks to come. There is simply no more extra oil (except maybe the SPR, but that petroleum is problematic as it is yet to be refined, and refineries are already at capacity if they survived the storm, Chuck Schumer, you idiot.) we can call upon to put into the system.
With supply and demand balanced as it is (and with demand only growing over time from places like China and India), it only takes one "something" (terror, weather, malevolent world politician) to disrupt this gently balanced system.
This is what Goldman Sachs was saying six months ago when they introduced the idea of a $105/bbl superspike. NB, I am not saying this is the "superspike." However, if this is an event that really disrupts supply it could mean a terribly volatile market with a price spike...(and yes, that $105/bbl number probably equals somewhere around $4/gal or more for gas or even worse, a shortage of supply because of systemic problems).
Let's not forget the human cost today. Our thoughts and prayers are with these people. Please note the Red Cross box in the upper right hand corner of the site, if you are so inclined.
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"this is not a comment informed by economics, it is an economisty comment, using economic terminology to obscure the essential info. Of course, by definition, 'supply' and 'demand' are balanced. That tells us nothing of interest.
What is of interest is that physically there is not the unused over-capacity among oil suppliers that there used to be. That means that when supply is knocked out in the Gulf, the Saudi's can't turn on the spigots and flood the market. That means that now, today, in the real world, the Saudi's can't prevent a price spike.
Hello? Do you see why that is important, and the notion that in the abstract, 'supply' and 'demand' always balance is just so much pointy headed blather?" -camille roy
do please continue.
=Let me say a little more about supply and demand then.
This site has had a persistent problem with misusing and misstating the relationship and the facts about the current supply and demand situation. Now that we are on the old site I couldn't help noticing the last posting here before moving to the new site, from Aug 19: "More EIA: Demand will Outstrip Supply in Q4 '05 and Q1 and Q4 of '06 - Something we've talked about already, but more evidence of it. The EIA officially is stating that oil demand will outstrip supply in the fourth quarter of this year, as well as in Q1 and Q4 of 2006. (hat tip: peakoil.com.)"
This is just total BS. The so-called demand here is merely another word for consumption. When "demand outstrips supply" or vice versa in this sense, it only means that we are slightly building up or drawing down reserves. It is a normal process in the oil business and happens every year. It has absolutely nothing to do with Peak Oil. Yet this site has continued to post messages like this that mislead readers. That's why I objected to the claim that demand and supply are balanced on a knife edge. It is very much in keeping with those earlier postings that were fundamentally misleading. Demand and supply have always been balanced like that in the oil business, but this site has persisted in misunderstanding that and presenting the balance as if it is new.
But let's suppose that what PG really meant in the recent post is that the world does not have much excess capacity, due to Peak Oil. There are two things wrong with this. First, the world does in fact have some excess capacity now. See http://money.cnn.com/2005/08/28/news/international/bc.markets.oil.reut/index.html : 'Oil Minister Ali al-Naimi told the state news agency SPA that the OPEC giant was in touch with its customers, especially in the United States, to assist in any supply shortfall but said that world oil markets were currently "well-balanced" and that supplies were adequate. "To the extent that markets are concerned about the impact of Hurricane Katrina on the availability of crude oil supply, the minister said that Saudi Arabia stands ready to increase oil production immediately to 11 million barrels per day and sustain that level to replace any shortages in the crude oil market," SPA said.'
And second, the real issue for Peak Oil is not how much excess capacity there is on any given day. No doubt there are many commodities which don't have much excess production capacity. Farms couldn't double their milk output tomorrow but that doesn't mean we're hitting Peak Milk. The real issue is whether it will be possible to ramp up production smoothly over the next few years to meet expected demand levels. Just because they can't increase production by huge amounts in a short time doesn't mean that they can't increase over a period of years. The latter question is the real issue for Peak Oil, and the failure to have lots of excess capacity on a day to day basis is not the same thing.
One final point, as far as the SPR, even just for sweet crude they have over 200 million barrels, more than enough to get us through a 1 mbpd temporary shortfall. And initial reports are that refineries will be able to get back in business quickly, so hopefully the impact on gas won't be that bad. Gasoline demand cuts back after Labor Day anyway, which is only a week away.
Even if the saudis increased their output right now, that's not going to solve the problems due to the passage of Katrina no?
Given that Katrina damaged refineries...
A whole lot of what economicsts do has to do with the shape of those curves: Do they slope steeply, or are they relatively flat? Is the whole curve shifting out or back?
Gasoline stocks are near the lower end of the normal average. So it is possible we could have a supply issue for gasoline depending on the damage to the refineries. So gasoline (also NG and heating oil) is the short term concern, not crude oil.
Best Regards.
If there is still excess capacity, how do you explain the consistent rise in price during the last three years?
Other than that, can anybody tell me what kind of crude is produced in the area?
While I'm not Halfin, I can say that there's a difference between having excess capacity and having excess capacity of light sweet crude. As was noted in an earlier article, light sweet crude may have already peaked.
That's a good question. Crude oil, as has been discussed on this board, comes in different grades. Light sweet oil is best for producing gasoline. Heavy sour (high sulfur) oil produces less gasoline unless extra processing steps are taken, which many refineries are not set up for. Here is an article about a company that specializes in refining sour crude and is making big profits as a result, as the sweet/sour price spread has greatly increased lately [Econbrowser link].
I have learned that the Gulf of Mexico produces both sweet and sour grades. The better grades are called Louisiana Sweet, both heavy (HLS) and light (LLS). The sour crude is called Mars. There are separate pipelines for dealing with the different grades and separate refining facilities. I haven't found any figures on the mix or percentage production of the two grades. It may vary depending on market demand.
Another thing I learned is that most OPEC crude is relatively sour. Saudi Arabian oil is light sweet but most of the rest of the oil producing countries don't have such high grades. Mars, the sour crude from the Gulf, is pretty comparable to Dubai crude and also similar to the North Slope Alaskan crude. There's a lot of sour oil in the world, most of it is not the champaigne that comes out of Saudi sands. It's a mistake to think that sour oil is no good. It is still usable, it's just not as nice as the sweet grades. That's one reason for the increase in the price difference, as the sour gets cheaper it becomes more economical as a substitute for sweeter grades. It's about $15 less per barrel now.
The bottom line is that most places don't produce oil as light and sweet as Saudi Arabia, and that probably includes the gulf. I gather that a substantial part is the sour Mars grade. The Strategic Petroleum Reserve is about 2/3 sour and 1/3 sweet, and that is probably not too different from the mix of crudes produced domestically in the U.S.