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Web Extra Friday, September 9, 2005

Katrina strikes the energy sector

In the nearly two weeks since Hurricane Katrina struck the Gulf Coast, the nation's energy sector — and its citzens' emotions — have been on a roller coaster ride. Although there are signs that the situation is stabilizing, experts say the full impact of the hurricane will take awhile to reveal itself. In the meantime, consumers are dealing with higher gas prices, somewhat attributable to their own fears, while the energy sector is getting back online.

The week before the hurricane hit, oil prices teetered around the $65 mark and gasoline prices hovered around $2.60 nationwide. But since Aug. 29, oil shot up over $70 a barrel, only to come down pretty quickly and settle back around $65 this week. Gas prices skyrocketed to well above $3 a gallon, where they have stayed. The Energy Information Administration (EIA) says the national average this week was $3.07, though the East Coast, Midwest and South saw prices that were significantly higher. The current average is only 4 cents less than the all-time, inflation-adjusted high that gas hit in 1981.

The full extent of the energy infrastructure in the Gulf of Mexico is difficult to imagine: 819 manned oil platforms, several thousand smaller unmanned platforms, 134 active rigs and 53,000 kilometers of underwater pipelines, many of which reach shore at the mouth of the Mississippi River. The Gulf accounts for 35 percent of U.S. domestic oil production and 20 percent of U.S. natural gas production, according to EIA. Additionally, about 10 percent of U.S. oil imports run through ports on the Gulf Coast, which also houses many refineries and on-land pipeline networks.

According to the U.S. Minerals Management Service (MMS), close to 80 percent of the manned oil platforms in the Gulf of Mexico were evacuated with production shut down prior to the storm, along with almost 70 percent of rigs. By Thursday, only 15 percent of the manned platforms and 3 percent of the rigs remained empty, but production was still down almost 1 million barrels of oil a day.

Since the hurricane hit, Gulf of Mexico production is down a total of 14.6 million barrels, or 2.66 percent of annual production. At least 50 oil platforms or rigs were severely damaged or lost (at least 20 are still missing, either sunk or far adrift), says John Felmy, an economist with the American Petroleum Institute, an industry trade group in Washington, D.C. One such well-photographed drilling platform broke loose of its moorings and remains wedged against a bridge in Mobile, Ala.

"We are still a ways away from restoring production at many of the rigs," Felmy says, "and we are likely months away from running at full capacity." Before restarting these rigs, energy companies must inspect them both at the surface and below the water, he says. With so much widespread damage in the area, getting the personnel and resources to perform the tests and inspections will take some time.

Energy companies will also have to assess damages to the undersea pipelines that transport oil and gas from the rigs to shore, which could take weeks to months. Following last year's Hurricane Ivan, the energy industry learned just how vulnerable underwater pipelines are to undersea mudslides, which can damage pipelines and knock platforms off their moorings. Ivan triggered a research program last spring to determine how to improve or protect platforms and pipelines to withstand such storms, according to Gary Strasburg, MMS spokesman.

Katrina also knocked out power to the aboveground pipelines that transport petroleum to the Midwest and East Coast, which is a primary factor in the gas price roller coaster in those areas. The pipelines were back online two days after the storm passed, and operating at full capacity last Tuesday.

The other major factor in gas prices is the refineries, which convert crude oil into gasoline and home heating oil, among other products; in the week following Katrina, the United States lost 10 percent of its refining capacity. The hurricane completely shut down 10 refineries along the Gulf Coast and slowed operations at six others across the region. Although much of the refining capacity has come back quickly, six facilities remain closed. Two are expected back up in the next day or two, according to EIA, but four (together representing 5 percent of the nation's refining capacity) will likely remain closed for an extended period, due to severe damage, flooding and lack of electricity. "Considering the inspectors can't even get in to assess the damages, it's really indeterminate how long they'll be down," Felmy says.

Although the storm significantly challenged the nation's energy infrastructure, perhaps the bigger reason that gas prices went up as high as they did was consumer behavior, Felmy says. In Atlanta, for example, CNN reported prices topping $5 a gallon, which receded toward $3 the very next day. Some gas stations throughout the South, as well as the East Coast and Midwest, actually ran out of gas or reported gas lines reminiscent of those during the OPEC oil embargo in the 1970s.

The price spike was due in large part to "absurd rumors" about gas shortages, so consumers rushed out to fill their tanks, whether they needed gas or not, Felmy says. Demand increases of that magnitude are enough to trigger gas shortages and drive prices higher even when things are normal, he says, so when the system is already unforgivably tight, "we can see real problems."

According to EIA Administrator Guy Caruso, consumers should expect gas prices to back off slightly from the record highs of last week, but to remain relatively high. How long the prices will stay high, he told a Senate panel on Tuesday, depends on the severity of damage to the facilities in the Gulf. Globally tight supplies in a changed petroleum market have been "significantly exacerbated" by Hurricane Katrina, he said.

Legislators and consumers alike want lower gas prices. Alongside aid to Katrina's victims, topping Congress' agenda when members returned from August recess this week was energy prices.

But government leaders need not exacerbate the situation by calling for measures such as price controls and gasoline rations, Felmy says — ideas that have been bantered about in many states and actually enacted in Hawaii, which are "very bad ideas." Price controls and allocations do not change consumer behavior for the good and instead can cause an imbalance in supplies and consumer panic. Such measures "would be disastrous" at a national level, he says.

Conservation is necessary immediately, energy experts agree, and can be promoted by the government. The quickest way to take pressure off the market is through self-imposed "modest restraints on demand," wrote Daniel Yergin, chairman of Cambridge Energy Research Associates, in The Wall Street Journal on Sept. 2. People should only fill up tanks when they're actually out of gas, experts say, and take measures to make their vehicles more fuel-efficient, such as driving slower, properly inflating tires and getting regular tune-ups. They also recommend combining short errand runs into single trips and taking public transportation or carpooling. How to solve U.S. energy woes long-term, however, remains contentious.

Megan Sever

Energy Information Administration report on Katrina
American Petroleum Institute
Cambridge Energy Research Associates (Yergin's editorial)
U.S. Minerals Management Service
Katrina story and picture on USA Today about oil
"At the pump, Part I," Geotimes, May 2004
"At the pump, Part II," Geotimes, June 2004
"Water covers New Orleans," Geotimes Web Extra, Sept. 1
"Hurricane Katrina hits hard," Geotimes Web Extra, Aug. 30

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