Peak Oil News: The Peak-Oil Crisis: The Storms of August

Thursday, September 08, 2005

The Peak-Oil Crisis: The Storms of August

Falls Church News-Press

By Tom Whipple

It has become fashionable in peak oil circles to make the comparison between the current summer and that of 1914— just before the cataclysm of World War I. That year too, was a warm and idyllic summer in which the people went happily about their business unaware the assassination of an archduke was about to destroy the old order and plunge the world into decades of turmoil.

This time, the trouble spawned in the South Atlantic , strengthened in a global-warmed Caribbean and slammed into the heart of the US oil industry. The flooding of New Orleans and the destruction of miles of the Gulf coast will rank among the greatest natural disasters America has ever known, for a number of reasons.

For the Gulf oil industry, the approach of a Category 5 Hurricane was a signal to shutdown and run for cover. The super tankers bringing up to 900,000 barrels a day to the Louisiana Offshore Oil Port (The LOOP) headed elsewhere. The 55,000 oil workers on platforms out in the Gulf shut off the pumps, plugged their wells, and boarded ships and helicopters to safety, thus halting the production of some 1.4 million barrels of oil a day — some seven percent of US daily consumption.

Eight refineries in the path of the storm were shut down and the workers evacuated. This reduced immediately US refining by 1.8 million barrels a day.

As the storm moved towards shore, first the offshore oil platforms in its path were badly mauled. Some 30 rigs were sunk including hubs that concentrate and prepare the oil for transport to shore. We do not yet have a complete assessment of the damage to the undersea network of pipelines that brings the oil to shore, but if the damage done by much weaker Hurricane Ivan last year is any guide it should be considerable. In the opinion of one knowledgeable commentator, it will take years to bring production back to pre-hurricane levels.

Finally, the storm cut the electricity to the pipelines moving some 3 million barrels per day of gasoline, jet fuel, and heating oil from the Gulf refineries to consumers in the mid-west and the East Coast.

The week before the hurricane, the US gasoline inventory was down to 194 million barrels or about a 19-day supply. The loss of production from 10 refineries and the shutting down of the pipelines soon led to spot shortages running from the Rockies through the mid-west to the Southeast. The West Coast and north of New York are not part of the Gulf oil infrastructure.

As could be expected, spot shortages quickly developed as long as the pipelines were out of operation and local distributors had to rely on whatever inventory was in their tank farms. Panic buying added to the problem. In the Washington area, Exxon-Mobile reported that their sales doubled as people rushed to fill their tanks in face of rapidly rising prices and potential shortages.

By week's end, however, the electricity was restored to the pipelines and an additional 20 days supply became available to the south eastern states. (It takes about 20 days for a barrel of oil to pop out in Virginia once it has entered the pipeline.)

The reopening of the pipelines, of course, takes care of our fuel supply for the next couple of weeks, but what about the missing 1.4 million barrels of daily production from the Gulf and the gasoline from the four severely damaged refineries?

As soon as the Administration became aware of the extent of the losses, it made a decision. As any one who follows the world energy situation knows, the worldwide supply and demand situation is extremely tight. OPEC has no spare production capacity, except possibly for some sour, heavy, hard to refine crude from Saudi Arabia . US refineries have been running flat out for months. In this situation, the only choice was conservation or borrowing. They chose to borrow.

The first borrowing was from the US strategic petroleum reserve, which was just topped up to its authorized 700 million barrels last month. A release from strategic reserves is supposed to be a joint decision of all the 26 members of Paris-based International Energy Agency (IEA), so initially the Administration "loaned" petroleum to Louisiana refineries that were still operational, but had lost their crude supplies from the Gulf.

After a series of urgent meetings, the IEA agreed to honor international commitments and voted for a one-month release of 60 million barrels of crude and refined products from its members' strategic reserve stocks to stabilize the world energy situation during the crisis.

About half the "release," is to come from the US strategic reserve and the rest, mainly refined products, will come from other IEA members stockpiles. About 20 percent will come from Japan and other Asian countries, 10 percent from Germany , seven percent from France , and five percent from Spain .

Now we get to the key question of what all this means for those of us living here on the East Coast and who are hopelessly dependent on Gulf produced or refined oil for our lifestyles and livelihoods.

First, there will be an unprecedented natural gas problem this winter with prices increasing several fold and there will most likely be serious shortages. There is simply no way to replace the shut-in Gulf production in time for the winter heating season.

Next, our gasoline and jet fuel supplies here in Virginia , are precarious to say the least. For the next few weeks, inventories should be sufficient to prevent a general shortage. After that, much depends on the speed with which the heavily damaged refineries can be repaired and the willingness or ability of Europe and wealthy Asian nations to keep shipping us gasoline.

Already, European editorial writers and columnists are starting to grumble. They raise the specter of Americans in Hummers, gobbling up Europe 's heating oil for next winter. The head of the IEA warned that there will be a worldwide energy crisis if the US tries to replace its missing oil production and gasoline refining by outbidding everyone else on the world market. As usual, it is the poor African nations that will suffer the most. Furthermore, it is becoming evident that $3-4 gasoline does not significantly reduce American consumption and that we will continue driving at our normal pace until stopped by still higher prices or general shortages.

What does the hurricane damage have to do with peak oil? World production and consumption are currently balanced at around 84 million barrels a day. Losing a million plus of this for an indefinite period certainly doesn't help increase production. This time, there is no sign of our Saudi friends coming to the rescue as in past oil crises. Given the decline of production taking place in most of the world's major oil fields, it is becoming increasing difficult to make a case for significantly higher levels of world oil production are on the horizon.

For the United States , borrowing our way out of the current predicament without any serious conservation measures (such as a 55 mph speed limit or rationing) certainly can't last long.

Several years ago Kenneth Deffeyes, one of the leading peak oil theorists, facetiously selected Thanksgiving 2005 as the exact date the world would reach Hubbert's peak. You know, it is starting to look as if he just might be right.


At 7:35 PM, September 08, 2005, Anonymous Anonymous said...

Mr. Whipple needs to be more patient. Gasoline demand has short term (0.1) and long term (more) elasticity. Long term changes won't kick in much until people are convinced that the price runup is not some kind of blip that the politicians can clear up by waving their wands and imposing price controls.

The immense profitability of exurban real estate also helps sustain demand, since no likely price of gasoline can dent that, not even at 100 miles roundtrip. Now, after the real-estate bubble bursts...


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