It may not be that easy
Posted by Heading Out on August 29, 2005 - 10:20pm
Watching Nightline tonight and the aerial fly-over of outer New Orleans, the real size of the disaster is just becoming apparent. One of the levees did apparently fail, and now there are regions where only the roofs of the houses are visible. The problem is that New Orleans is below sea level, and thus this water will not go away until the levee is repaired and the pumps can remove the water. With the area of devastation already large (and perhaps still growing) and no power in the city, this will take a serious amount of time. And by that time, as Ted Koppel pointed out, the houses will be destroyed.
The refineries are on the other side of the river from downtown, and so I am not sure how rapidly they will be drained, but as the NYT reports
Valero, the nation's largest independent refiner, indicated that it might be two weeks before it could restart its St. Charles refinery in Louisiana. The refinery was under three feet of water and sustained "minor damage" to its cooling tower, the company said.Depending on how much water is in the refineries, and how it got there (levee failure or just rain) will determine whether, what might otherwise be a relatively undamaged refinery, can be brought back on line for quite a time.
Hurricane Katrina is the most severe storm to affect the oil industry since Hurricane Ivan tore through the gulf last September. That storm destroyed seven offshore platforms and cut 7 percent of the region's yearly oil production and 4 percent of its total gas output. It also caused huge damage to the underwater pipeline network, requiring as much as six months to repair."The crunch is on refineries," said Roger Diwan, a managing director at PFC Energy, an oil consultancy in Washington. "Restarting a refinery is a very delicate operation. These things can blow up. They are complicated, old and cranky."If refineries don't start by Wednesday or Thursday, the stock draw is going to be dramatic," he said. "Already, gasoline stocks are low. This will further tighten the market."
“No civilization can survive the physical destruction of its resource base.”
—Bruce Sterling
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http://tinyurl.com/akt2t
http://www.nytimes.com/2005/08/30/national/30coast.html
"The consequences were clear yesterday, Dr. Dokka said, around Port Fourchon, La., where the single road that is the commuting route for oil workers heading to offshore rigs lay under water. "That road that all the roughnecks and oil workers drive down every day has sunk a foot in 20 years," he said. "It's now under water every time there's a significant south wind blowing.""
They had a reporter who flew over Port Fourchon yesterday who says that he was told it will be weeks if not longer than a month before the facility is back up again. Apparently the damage was quite extensive.
They also interviewed someone from Valero who said it will be at least 2 weeks until that St. Charles refinery is back up. One of their biggest problems is lack of humans to do the necessary work, not to mention lack of power and downed power lines within the facility, and time needed to go through all the startup test procedures.
Not only energy offloading at issue but also servicing the rigs - with shops / plants / repair and new construction facilities in the area (I assume) they are going to have a hard time getting those needed materials out of the area to the rigs and platforms if so.
As of yesterday evening the markets had downplayed and discounted storm damage. Yes, there was some talk of supply tightening but not a big deal over all.
It strikes me that the people posting at TOD are very accurate in there assessment of the situation. Both Katrina and Peak Oil in general. The problem is that the "Market" is very slow at recognizing problems.
I fully expect that supply will be disrupted within the range discussed here over the weekend. However, I think the market will take at least a week to fully understand this and send signals that there is a problem. In the interim there will be calls to tap the SPR, move refinery production elsewhere, use different ports, etc. Only after we find out this isn't working will prices rise significantly.
This is my main concern about letting markets dictate energy policy. It is only reactionary. It is too slow to recognize problems, even when they happen. It has no planning component to prevent predicted problems. I don't trust the market to operate well in crisis situations.
Lets see if my prediction comes true. Or if I am just a doomsdayer as well!
True, the traders often get it wrong, sometimes spectactularly. Compare their "predictions" of the price of oil in 2008 that they made two years ago vs. predictions for that same time today. It looks like two completely different views of reality, which, in all candor, it is.
But the commodities markets do serve a valuable purpose, in that they extrapolate the current analysis to future months. In effect they provide a "lookahead" function for the economy. You're right that they're often reactive, needing a smack over the head with a 2x4 before they notice what's going on, but once they get the message they provide a much needed (if belated) service.
One other thing to keep in mind about the markets is that the people buying and selling there are NOT trying to guess what will happen with market prices, but what other people will guess about prices. That's a subtle point that many people overlook; traders don't make money by correctly guessing about fundamentals, they make money by outguessing their fellow traders about future market prices, which are in turn determined by everyone's collective guesses abtuo everyone else's guesses.
The competing interests, patience levels, risk tolerance, and deepness of pockets make the market what it is...
http://www.nola.com/newslogs/breakingtp/
Er, you mean it makes the problem much more visible. As gas might currently be mighty cheap, and the cheapness of gas being a bad thing (encourages dependence), it could be argued that raising the price would be helping.
If one had faith in the leaders of the USA doing something intelligent, that would be a great thing. Attach signal flares to oil/gas issues. As one who doesn't believe the republicrats (not a typo) will make wice decisions, it might be best to try to keep the price of gas low. So stock up with what you need, but it's probably not for the best to tell anyone who hasn't already independently come up with the idea on their own.
But regarding storing of gas, what are the legal methods to store it? It might make a lot of sense to get a large 200+ gallon storage container setup in the garage, but I need to look into the legalities of it.
Why do oil futures go up when there is destruction to refineries. I understand why gas futures would skyrocket, but shouldn't oil futures go down since there is no place to offload the oil and therefore demand should drop?
- New Orleans is also a hub for lots of oil production, esp. off-shore in the Gulf. Katrina has disrupted that production, so oil prices should rise on the supply reduction.
- Oil contracts are for the delivery of a quantity of oil at a time AND PLACE in the future. The contract includes the cost of moving the oil to the specified place. I think for many contracts the PLACE is in the US. Thus damage to the oil transport infrastructure in New Orleans, which accounts for 10-20% of US imports, would have a sharp effect on the ability of oil to be delivered - and hence the price would rise.
Silent EThis is a frequently asked question but I haven't seen a very good answer. I have read of two explanations that I will pass on.
The first is that historically there has always been a correlation between gas prices and oil prices in the futures markets. This historical relationship means that traders expect to see them moving together, and this expecation then automatically becomes reality. When they see a move in gas or oil they will make corresponding trades in the other commodity in the expectation that it will move the same way, and these trades then drive the prices in exactly that way.
The other explanation is that although a refinery problem may reduce oil demand now, once the refinery is fixed there will be a backlog of demand as gasoline stores have been drawn down, hence there will be increased demand for oil in the future. The markets anticipate this demand and so the price goes up as soon as the refinery fails.
Now, in this particular case with Katrina we have other reasons to see high oil prices, because both gas refining and oil supplies have been disrupted. But there have certainly been cases in the past where refineries have been shut down and it has led to oil price rises. Maybe these ideas can help to see what is happening, although I have to confess that they both seem a bit illogical to me.
Case in point - natural gas. The amount of energy per mbtu of NG can be expressed as a ratio to the amount of energy per bbl crude, and price follows that ratio. Oil rises, NG rises. That NG is a local, purely domestic for all intents and purposes (still), production and consumption market seems not to matter when international events drive up crude, NG tags along.
Crude is, at its essence, a proxy for net energy available to the economy.
And yes, there is international supply of refined products; I've not undertaken a careful study of capacity constraints in the traditional suppliers (Canada being among the largest) to the US of refined products.