The impact of Hurricane Katrina on U.S. oil production and refinery capabilities may be worse than initial reports estimated and could lead to a national gas crisis in the short-term, analysts warned Tuesday.
Said Englund, "Going into the hurricane we had a shortage of refining capacity anyway. This just throws a hand grenade into the already delicate balance."
Consumers have been absorbing the sticker shock at the pump for months already without greatly altering their spending habits. However, analysts cautioned that if gas prices reach $3 a gallon, it could force consumers to make noticeable changes to their budgets.
And if spending slows, that in turn threatens to dampen economic growth since consumer spending fuels two-thirds of the economy.
"Apart from refineries, some pipelines may also have been damaged," said Englund. "Companies can switch over production to other refineries but it's not a quick process. It's very likely that we could have a short-term gas crunch which will keep prices elevated."
Traders are already bidding-up oil prices because of the refinery shutdowns. This will most likely continue until there is firm confirmation that refineries are up and running. That requires that power be restored and the work environment be safe for the repair crews. That looks at least a few days away at this time.
The release of oil from the Strategic Petroleum Reserve is a nice public relations gesture, but it does not deal with the main problem: lack of refinery capacity.
"It could produce a nasty quarter," Englund said, adding the storm would likely cut fourth-quarter GDP by 0.6 percentage points.
The key unknown is how much damage petroleum refineries suffered. The U.S. could conceivably import more crude petroleum to replace Gulf production, but it's almost impossible to replace lost refinery capacity.
Americans could be swimming in crude, but wouldn't have a drop of gasoline to run their cars.
Louisiana, Mississippi and Alabama are home to 24 refineries with daily capacity of 3.3 million barrels, said Michael Helmar, an economist for Economy.com. Sixteen of the refineries are on the coast.
Let's play the oil scenario out. Traders are already concerned the loss of refining capacity will lead to shortages. This will lead to further increases in gas prices at the pump, which will further impair consumer budgets. Wal-Mart has already lowered second half earnings expectations, partly because of their projection that lower-income consumers will spend less because of higher gas prices. In other words, gas prices are already slowing consumer spending. An oil price spike would probably add another crimp.
Possibly compounding the problem is the amount of time required to repair the refineries. I would project refineries would be some of the first projects to get power because of their national importance. However, it will still take time to repair the damage. And literally every day counts. The longer it takes to restore, the more pressure builds in the oil markets that refinery capacity will not be able to meet demand.
However, the loss of refinery production is not the only variable to consider. Getting the oil to the refineries may also be a problem in the near future.
The other major unknown is the condition of crucial ports to bring in imported petroleum and oil and gas produced in the Gulf.
The vital Louisiana Offshore Oil Port, the only U.S. port that can handle supertankers, apparently escaped major damage, the manager of the port told Dow Jones NewsWires.
The major onshore port at Port Fourchon, also escaped major damage, according to Dow Jones NewsWires. The port is the base for oil service operations for oil rigs in the Gulf.
However, the channel leading to the port may have suffered severe silting from the storm surge. Dredging the channel could take weeks or longer. There could be a "very large impact to the energy supply," if the port can't reopen, port manager Ted Falgout told CNBC.
So, it looks as though the major transmission facilities were spared major damage. However, we still don't know if tankers can get oil to these facilities.
The real question is: "How long will the effects last?" There is no answer for that. People are still assessing the damage. However, time is of the essence. It is imperative the people in charge deal with the situation quickly and definitively. The longer it takes to clear the channel and get the refineries up and running, the greater the likelihood of increasing negative economic impact.
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