This piece ran in today's NY Times:
Katrina's Shock to the System
By JAD MOUAWAD
DRIVERS waiting in line for hours, and occasionally in vain, to fill up their tanks. Gasoline prices shooting up 50 percent or more overnight. The president urging everyone to curtail driving and conserve energy at home. Dark rumors of hoarding and market manipulation starting to spread. Economists warning that soaring energy costs will certainly slow economic growth - and maybe snuff it out completely.
As those scenes played out across the country last week, they may have looked familiar, a bit like a replay of the fallout from the Arab oil embargo of 30 years ago. Many energy analysts and economists are not surprised. When Hurricane Katrina ripped through the oil rigs and refineries along the Gulf Coast last week, it not only killed at least hundreds of people and caused billions of dollars in damage. It also set off the first oil shock of the 21st century.
"This is a lot like 1973," said Daniel Yergin, who wrote a Pulitzer Prize-winning history of oil, "The Prize: The Epic Quest for Oil, Money and Power," and is the chairman of Cambridge Energy Research Associates. "Since Monday, we've had a supply shock on top of a demand shock."
I was a young man back in 1973, just three months past my seventeenth birthday. I was working part-time as a pump jockey at a local gas station when the crisis hit.
Insufferably long diary follows:
And just as the 1973 crisis led to a global shortage of oil that sent prices soaring and pushed the American economy into recession, today's sudden shortfall of gasoline that is rippling through the economy is likely to slow American growth by as much as a full percentage point. And it leaves global energy markets vulnerable, analysts and economists said.
Needless to say, night time pump jockeys were the first casualties. All stations opened at the crack of dawn and only stayed open until they sold their daily allotment. Most stations were closed again by 9:00 AM.
For two years, steadily rising prices barely weighed on global economic growth, in part because of the expanding economies of China and the United States, and not from a lack of supply. The price of crude oil on the New York Mercantile Exchange doubled to $66 before the hurricane from $33 a barrel in January 2004. Demand, meanwhile, has grown by more than 2 percent annually over the last two years, twice the average annual pace over the preceding decade.
Then came Hurricane Katrina. With winds as high as 175 miles per hour, it shut down most offshore platforms and onshore wells in the region - which accounts for over a quarter of domestic oil production - and idled 10 percent of the country's refining industry. Those assets may be out of commission for months while the industry scrambles to repair battered platforms and underwater pipelines. But the effects of the current crisis will be felt around the world for much longer.
In less than a week, gasoline prices have jumped by as much as 60 cents a gallon, with stations selling premium grades at an average $3 a gallon, according to AAA. On average, gasoline is 50 percent more expensive than it was last year. "We're in uncharted territory," said John Felmy, the chief economist at the American Petroleum Institute, the industry's main trade group. "We haven't experienced something like this since the 1980's."
Fortunately for all the Eighties fuel crunch was short lived. Gas lines reappeared for a couple of weeks but once the price got up to where they wanted it, they disappeared again.
This is perception vs. reality. The consumer saw personal hardship and rising prices until the price of gas leveled off, then we were swimming in oil again!
It was during this short-lived second crisis that many consumers, when interviewed at the pumps, said they didn't care how much it cost so long as they could get it when they wanted it...
Be careful what you wish for.
That was when Iran sent oil markets roiling. With the departure of the shah, the establishment of the Islamic revolution, and, in 1981, the start of a long and bloody war between Iran and Iraq, oil exports from the Persian Gulf plummeted, sending oil prices to their highest-ever level of nearly $40 a barrel - about $86 a barrel in today's dollars.
Then, as now, drivers, factories, power plants and others were consuming oil as fast as oil companies could refine crude oil into fuel or other products. Any significant disruption to the supply was quickly magnified in the markets.
"No new refinery has been built in the United States since 1976." I lifted this line straight from further down in this same article. The newest US refinery is thirty years old, but wait, it gets better! "Over the last quarter-century, the number of refineries has fallen by more than half, to 149."
Okay, we buying up gas as fast as they can make it but their capacity to make it has been cut by more than fifty percent since the original oil crisis in 1973!
One problem today is the supply of crude oil. Years of under investment in exploration mean that producers now lack the capacity to bolster production in any significant way to make up for intermittent shortages. Even Saudi Arabia, which had millions of barrels of untapped production capability in the 1980's, is now pumping at close to full capacity.
But far more important for the current energy crisis, a lack of refining capacity constrains the industry's ability to turn crude oil, even when it is available, into usable products like gasoline or jet fuel.
The nation's strategic reserve is stocked with enough oil to last about 35 days, and refiners hold an additional 25 days' worth of supplies. But with hurricane-hammered refineries out of business for now, the immediate pinch comes in turning oil into gasoline.
There's a sound reason for the `years of under investment' in the search for new sources of crude...there's no where left to look. Okay, qualifier, there's no `reasonable' place left to look. There MAY be oil under the (really) deep blue sea but for the moment the complexities (not to mention dangers) of getting to it outweighs the benefit of doing so.
Deep sea oil may cost three times as much as oil obtained from easy to reach surface sources.
The shortage of refineries explains why gasoline futures surged 14 percent last week while crude oil prices gained only 2 percent. Oil touched a high of $70.85 on Wednesday and closed at $67.57 a barrel on Friday; gasoline futures on Nymex, which touched $2.92 a gallon at midweek, ended the week at $2.18.
Current price at the pump is well over three dollars a gallon for regular across the nation...and in most cases you have to pump it yourself! Thirty years ago prices were thirty cents a gallon AND someone pumped it for you!
From Aug. 26, when platforms were evacuated in anticipation of the storm, until Friday, the total amount of lost oil production was 8.7 million barrels - or about 1.3 million barrels a day. That's not much compared with what was lost during the Arab oil embargo after the 1973 Yom Kippur war between Egypt and Israel. Then, an embargo on oil shipments to the United States led to a shortage of about five million barrels a day at its worst point, in December 1973.
The trouble was that America did not have any spare production capacity at that time, in contrast to the situation six years earlier, during the 1967 Arab-Israeli war. "Without it," Mr. Yergin wrote in "The Prize," "the United States had lost its critical ability to influence the world oil market."
A little between the lines here for those of you that don't get it. US oil fields, many of which were discovered in the late 1880's, were pretty much tapped out of `light, sweet' (easy to reach) crude by then (1973.)
Imagine this happening to oil fields around the world. Talk about desperate measures, some US oilfields are being pumped full of ocean water to raise up what little oil remains.
Something very similar is happening today. But this time, the United States has no refining capacity to spare. "The hurricane created a crisis, but the roots of the problem are much deeper than that," said Robert Mabro, president of the Oxford Institute for Energy Studies, and an authority on energy issues.
"The refining system is stretched, with no reserves, no excess capacity, no cushion," he said. "The fundamental problem is that we depend on oil companies that dislike the refining business because of historically low returns but whose deficit can produce an economic, social and political crisis."
But Mr. Mabro added: "There is an obligation to supply. For consumers, it's a public utility. If people can't get gas, they become furious, they become violent, they create trouble. Energy is a necessity."
No oil = no work! The economy, what's left of it, comes to a screeching halt! `Necessity' may be a bit of an understatement here.
No new refinery has been built in the United States since 1976. Over the last quarter-century, the number of refineries has fallen by more than half, to 149. Some, but not all, of that capacity has been made up by expanding or improving existing facilities. Refining capacity has declined by 10 percent, to 17 million barrels a day.
Over the same period, however, gasoline consumption has risen by 45 percent, to 9.5 million barrels a day. Domestic consumption of oil, including that used to make gasoline, is more than 20 million barrels a day.
It's not like the rise in consumption happened overnight. The people that run the oil industry also run the world. Sam Walton and Bill Gates may have a ton of money but they haven't started any wars (yet.) For the oil barons, Iraq is but one of many.
The 1973 and 1979-80 energy crises revealed how vulnerable industrialized economies were to sudden spikes in oil prices, and to shortages in supplies. Both shocks led to lasting recessions, high inflation and dismal economic prospects.
Oil producers realized how powerful the oil weapon could be but they also noticed that it was double-edged. The Arab oil embargo lasted from October 1973 through March 1974. Higher prices quickly led to recessions, which in turn lowered economic activity - and therefore lowered oil consumption.
Our cash burning economy relies on this very finite resource for its health. It's not possible to build a sustainable society on a perishable commodity. It's been a fun ride while it lasted but we have to wake up and smell the coffee, the future, if it is to be sustainable, will look very different than it does today.
It's a future we won't be able to reach if we continue to allow those who control money to rob us blind for their own benefit.
The good of the many outweighs the good of the few, or the one.
As a sign of the seriousness of the current crisis, Western governments on Friday pledged to release their emergency oil stocks to help plug the oil gap in the United States. The International Energy Agency, which was created in 1974 in the aftermath of the first oil shock, said its members would release two million barrels a day for the next 30 days. This was only the second time that the agency, based in Paris, had taken such a step. The first was in 1991 during the Persian Gulf war.
"This historic response is a remarkable signal of international solidarity in the face of the largest national disaster in America's history," said Samuel W. Bodman, the secretary of energy.
With all the parallels, there are substantial differences between 1973 and 2005 that might soften the blow to the economy. For example, in the 1970's, oil purchases accounted for twice as large a share of the gross domestic product as they do today. And back then, the American government had price controls on oil as well as an allocation system intended to ensure that all regions were supplied evenly.
That system backfired because it kept prices artificially low, thereby encouraging demand when supplies were short. Allocations from the government also did little to move supplies where they were most needed. The results were long lines at the gas pump and shortages in some places but not in others.
So it is good citizen that relief at the pumps is not coming. What worked during the last crisis has been abandoned in favor of a buy as much as you can afford philosophy!
This policy will fail because the boss (who does as little as possible) can afford to pay a lot more for fuel than their workers can. So society's highly compensated do-nothings will continue to run the price of fuel up while those who do the heavy lifting will simply stop showing up when they can no longer afford to buy gas!
Still, with no government control over either prices or supplies - and despite the global emergency coordination, the pledges of rising European imports and the loans from American strategic stocks - the risks to oil markets remain very high, analysts and economists said. The economy may be able to withstand current prices, but energy markets are at the mercy of the slightest glitch anywhere around the globe that can push prices even higher.
"If we had a major disruption in supplies elsewhere on top of that we could definitely go to triple-digit oil prices, no problem," said Vincent Lauerman, the global energy analyst at the Canadian Energy Research Institute, in Calgary, Alberta. "What we have right now is a runaway freight train. There's nothing I can see between it and higher prices."
The idea of $100-a-barrel oil, which was scoffed at as recently as two weeks ago, is now not so far-fetched. And its effect would be substantial.
Hurricane season is far from over good citizen and it seems every oil exporting nation is dealing with some kind of strife in their oil fields...much of it related to the people's general state of abject poverty while that country's elite lives in the lap of luxury, thanks to their control of oil.
"If oil hit $100, it would have quite a debilitating effect," said William Hummer, the chief economist at Wayne Hummer Investments. "The economy would slow to a crawl. We'd have a return to `stagflation', that cliché from the 1970's. We'd see a huge cutback in driving. The sacrifices would be severe. It would be another blow to the airlines and the whole transportation sector."
It's for this reason that I've never understood the appeal of `That Seventies Show' which re-imagines the Seventies as much happier time than they really were. The Seventies were the beginning of the end good citizen, it's been all downhill since that first oil crisis in 1973.
The Eurasia Group, a political risk consulting firm in New York, identified potential events in nine countries that could send prices higher - from terrorist attacks in Saudi Arabia, to which it gave a 10 percent probability; to unrest by oil workers in Nigeria, a 30 percent probability; or attacks on Iraq's oil industry, with a 50-50 probability.
In other words, said Mr. Felmy of the American Petroleum Institute: "There is no question that this is a global issue. We're all in this together."
We may `all be in this together' but some folks are doing the dance of joy (oil folks) because they've never had it this good! This time they've been handed a license to steal, the keys to the mint if you will thanks to our `oh so helpful' government.
Let's flip the rock over for a moment and look at what this article doesn't say. After two `oil emergencies' commerce in this nation went ahead and outsourced manufacturing operation wholesale to plants that are now thousands of miles away.
Say goodbye to `cheap' imports. Not only will these foreign operations experience the same rise in the cost of doing business. The cost of shipping their wares halfway around the friggin' planet is going through the roof!
Will this result in a resurgence in domestic manufacturing? Not likely, the principle factor that drove labor intensive work overseas is the relatively high price of domestic labor. Regrettably, if the dollar sinks to the basement, the currencies of the rest of the world will sink even lower.
How's that for a rock and a hard place? Seems like we can't win for losing. The `desperation' experienced by the citizens of New Orleans is only the beginning. Soon we will all be feeling the effects of Katrina every bit as acutely as those survivors in New Orleans...and the government is prepared to do absolutely nothing about it...so a few can be rich.
Which means exactly what it says, this situation does not have to be.
The change will do you good!
Thanks for letting me inside your head,
Gegner