Hopefully everyone out there hasn’t fully sealed themselves into the Wash U Bubble that seems to trap all of us eventually, but just in case you’ve missed the weekend news because you were part of the bad group of kiddies out there who were actually having parties the weekend before school started I’ve decided to present you with a small recap: New Orleans no longer exists, except for assorted vampires and the remnants of a Girls Gone Wild camera crew. Now while this is very bad news in and of itself and the fallout of Hurricane Katrina, one of the most disastrous and powerful hurricanes to hit the continental United States, will be felt for quite a long time down south, the extent of the damage to the rest of the nation is only now becoming known.

Hurricane Katrina forced the United States to shut down more than 10% of our refining capacity and over 25% of our production capacity. The short-term result of the closing of two of the East Coast’s major oil transportation pipelines will be prices well over $4 a gallon in the consumer market, especially in markets who have already had their supplies stretched by consistently growing demand, such as California. Once the pipelines are re-opened, which should happen “soon”, according to Colonial Pipeline, the price of gas should retreat to a level more on par with pre-shutdown levels. Worst case scenarios set the average price of gas at around $3.00/gallon for the next few months, with the best case scenario setting the price of gas around $2.60/gallon. The long term effects stretch beyond just the price of gas at the pump, however. The loss of transportation ability will ultimately result in a major setback to our nation’s efforts to create a larger strategic reserve of crude oil and natural gas and reduce our ability to weather short-term decreases in crude oil availability.

While the supply problem has always been on our minds, with the most notable example being the Arab Oil Embargo of the 70′s, a larger and, up until now, mostly ignored problem is no longer looming on the horizon, but has actually shown up, with no small thanks to Hurricane Katrina. This problem is the diminishing oil refining capacity of the United States. According to the Department of Energy, US refining capacity has “held steady” over the past few years at around 16 million barrels a day. Too bad that our demand has risen 41% since 1970 and doesn’t plan on stopping any time soon. Right now the rising price of gasoline, which accounts for around 40% of all crude oil used in the United States, is not due to an artificial and easily manipulated restraint, such as an embargo, but a very real and not so easily manipulated restraint, our ability to turn crude oil into refined gasoline. In 1983 we were only using 70% of our refining capacity. Want to guess how much we are using right now? 90%. That doesn’t leave much wiggle room, especially when one hurricane can shut down 10% of our refining capacity. Its also interesting to note that between 1991 and 2001, the profit rate for crude oil refining rose 15%. See any correlation here? During that time period we had presidents from both political parties in office, so neither party is really to blame, or maybe both parties are to blame for falling asleep while on guard duty. Its no wonder then that Shell tried desperately to demolish its refinery in Bakersfield, California (my childhood home, which says a lot about how much my parents loved me) and further increase the profitability margin of refining crude oil.

The lesson to be learned this week is that unless the United States steps up and works out a deal between environmentalists, who have legitimate concerns about the construction of new petroleum refineries, and oil companies, who don’t really want to increase their refining capacity any more than they have to, something bad will happen. The question of whether or not OPEC will export enough oil for the long term increase in demand is no longer important. The important question is whether or not we can convert that oil into something useful quickly enough to prevent gas prices from settling in for the long run at $4/gallon, something that was considered impossible just a few years ago.

Popularity: unranked [?]

 Print This Post

This entry was posted on Friday, September 2nd, 2005 at 12:00 pm and is filed under Forum. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.