Katrina and the Cost of Gasoline/Oil

Well, if you thought that gasoline prices were high now, just wait a couple of days. From the sounds of it Katrina has really done quite a number on the oil production in the gulf, and the oil refining in New Orleans area. This is like getting shot in the gut and the head. Even if Bush releases oil from the Strategic Patroleum Reserve it will likely have little impact. Why? Well there aren’t that many refineries and quite a few of them are located in Louisiana. In looking at a map at goolge.com my quick research tells me these refineries are probably down and will be for some time.

Refinery Barrels/day Location
ConocoPhillips 250,000 Belle Chasse
Motiva Enterprises, LLC  220,000 Norco
Valero St. Charles Refinery 155,160 Norco
St. Rose Refining (Shell) 55,000 St. Rose
Chalmette Refining, LLC 182,500 Chalmette
862,660  

In other words just under a million barrels/day of refining capacity has been taken off line. Add in that several off shore gulf rigs are likely also off line and it means that gasoline/oil prices are going to go up. Over at the Oil Drum Professor Goose notes that the U.S. uses about 20 million barrels per day (mbpd). Thus about 5% of the nations entire refining capacity just went away for an indeterminant amount of time.

This New York Times article is also chuck full of information. Such as that there are 4,000 drilling platforms in that region connected by 33,000 miles of underwater pipelines. The gulf region produces about 27% of the nations oil and 20% of the natural gas. Also oil production in the region was reduced by 92%.

So what about the Strategic Petroleum Reserve (SPR)? Not much. After all, it isn’t just the oil is going to be in short supply but also the refineries necessary to turn the oil in the SPR into gasoline. Valero is indicating it could be two weeks before its operations are back online. The St. Charles refinery noted above was under three feet of water and sustained minor damage to its cooling tower.

President Bush demonstrates a poor grasp of the situation,

“You just got to understand that the situation we got ourselves into, dependency on foreign sources of oil, took a while to get there, and it’s going to take a while to become less dependent,” Mr. Bush said.

As I’ve noted several times in this post, it isn’t simply the dependency on foreign oil (in fact that is a minor part of the picture which I’ll explain a bit more further down). Another big aspect of the problem is the lack of excess capacity in refineries. That part of the oil/gasoline supply line is also very tight. A slight problem there such as a Hurricane tearing up Louisiana.

As for the dependency on foreign oil that is “talking points/rhetorical bullsh*t”. Suppose we weren’t dependent on foreign oil and that we still obtained 27% of our oil from the Gulf region and there was a big hurricane. Oil production would still decrease and prices would go up. Somebody needs to inform Bush that we are talking about a world wide market for oil and that statements like the one above may sound good to the uninitiated on this issue, but to those who understand the issue he looks like a fool.

Well, at any rate I hope you weren’t planning on taking the RV out for the long weekend. Or if you do, I recommend driving it to the end of driveway and setting up camp there.

FILED UNDER: Economics and Business
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. Josh Cohen says:

    Heavens forefend we actually solve the problem by:

    (a) making a real effort to move toward non-gasoline-powered motor vehicles

    (b) building new and/or more efficient oil refineries

    (c) drilling for oil on US soil — especially in locations where we know oil exists

    If (who am I kidding… WHEN) Hilary wins in 2008 and suggests drilling in ANWR in 2010, the envirofascists will “reluctantly” agree to let her go ahead with the plan.

    (sigh)

    I’ll still be happy that we’re finally doing it. I just hate that it’s so partisan.

  2. WunderKraut says:

    Well said. I have been reading that there have not been any new refineries built in the States for the last 20 years. Is that right? I understand it is because of environmental laws and NIMBY types.

    This is shaping up to be the perfect storm. With economic growth across the world and demand is as high as it is, plus disruptions in production AND lost refining capability….It looks like I am going to have to re-do my budget…

  3. Herb says:

    After reading your blog and the “Oil Drum” article, It seems to me that this is rapidly going to be “Just another Oil Company” scheme to raise prices. As far as the reserves are concerned, I have just one question, How much per barrel will the oil companies pay the federal Government?
    I remember well the “so called” oil shortage in the 70’s. and tell you a fact. There were barge after barge after barge of gasoline sitting idle on the Ohio River near Midland PA. while evreyone was sitting in long lines at the gasoline atation. I also remember when there was a severe shortage of Jet fuel. A company I worked for at that time bought several barges of jet fuel in the Memphis TN. area that came up the Mississippi River from New Orleans. He then resold the jet fuel to locations as far away as Denver CO. at a very handsome profit.

    One additional question, How much drilling is going on in Californis and how many refineries are there in California? I don’t think to much or to many. If the people in California don’t want refineries or oil drilling, then they should be forced to do without. That goes for any state that won’t do their share.

    No, Katrina is going to be just one more excuse to be used to jack the prices up. Think I will start to compile a list there is getting to be so many.

    Say what you want and continue to make excuses, I am not buying them.

  4. dw says:

    I have been reading that there have not been any new refineries built in the States for the last 20 years. Is that right? I understand it is because of environmental laws and NIMBY types.

    What people forget is that we had a oil crash in 1984-87 that savaged the oil companies. Inefficient refineries were shut down, economically unsustainable oil wells capped. Environmental law often gets blamed for the shutdowns, but most of the shut refineries wouldn’t have been profitable even without the environmental protection requirements.

    When we came out of the mid-80s petroleum bottleneck, new refineries weren’t built because it was cheaper to add capacity at the old refineries than it was to deal with the NIMBYs. Now that there’s no more available capacity, we’re screwed.

  5. dw says:

    One additional question, How much drilling is going on in Californis and how many refineries are there in California? I don’t think to much or to many.

    Actually, there’s a lot. Huge refineries in the Bay Area and LA. Oil is still being pumped from under LA.

    If the people in California don’t want refineries or oil drilling, then they should be forced to do without. That goes for any state that won’t do their share.

    Then I guess Indiana can go back to the horse and buggy. Ditto Iowa, the Dakotas, Tennessee….

  6. Steve Verdon says:

    One additional question, How much drilling is going on in Californis and how many refineries are there in California?

    Doesn’t really matter. The point is that refining capacity is just about right to meet current demand. Thus, any disruption to one or more refineries at the same time can cause lots of problems. Or in other words, the CA refineries wont be able to pick up the slack. Further, there is the issue of gasoline additives. Gasoline that is legal for sale in say Nebraska may very well not be legal in CA or Vermont. Refineries would have to retool (which comes with a cost) to sell in states they don’t normally produce for.

    Really Herb, did you expect that when you retired you’d get a free ride?

    I don’t think to much or to many. If the people in California don’t want refineries or oil drilling, then they should be forced to do without. That goes for any state that won’t do their share.

    Sure thing Comrade Herb, the Party appreciates your insight into the problem.

    Say what you want and continue to make excuses, I am not buying them.

    You’re right Herb, Katrina was actually an oil company conspiracy. Good job spotting that.

    Heavens forefend we actually solve the problem by:

    (a) making a real effort to move toward non-gasoline-powered motor vehicles

    That is fine, but this comes with a cost. And unless you are going to use coercion this solution wont likely find much support until gasoline prices rise sufficiently to make these kinds of options viable.

    (b) building new and/or more efficient oil refineries

    Uhhhmmm, yeah. I thought that was one of the issues I was raising.

    (c) drilling for oil on US soil—especially in locations where we know oil exists

    If (who am I kidding… WHEN) Hilary wins in 2008 and suggests drilling in ANWR in 2010, the envirofascists will “reluctantly” agree to let her go ahead with the plan.

    Again, since we are talking about a world wide market this wont have much impact. Granted increasing the supply will help some, but not all that much.

  7. Herb says:

    Steve:

    Is it possible for you to make a reply to a comment without pinning a derogatory name to the person who made the comment. But then again when you tell me that you like the motto, “Play ball with me and I’ll shove the bat up your rear end” That tells everyone an awful lot about what you think of and how you treat others.

    You make out like you are a conservative, but your words are that of being self centered and greedy If that is how the conservatives are in your state, It’s no wonder it is BLUE.

  8. Steve Verdon says:

    Is it possible for you to make a reply to a comment without pinning a derogatory name to the person who made the comment.

    I’m sorry Herb, but your comments had the faint whiff of Stalinism to me. Your suggestion that other state’s do something for your benefit (as well as others) is, I think, a bit over the top. In fact, it sounds quite a bit like the farm policies in the Soviet Union under Stalin. Either you grow food for the State or you can starve. Now it is: Either you refine gasoline for other states or you don’t get any gasoline yourself.

    But then again when you tell me that you like the motto, “Play ball with me and I’ll shove the bat up your rear end” That tells everyone an awful lot about what you think of and how you treat others.

    I can my sarcasm didn’t come across well.

    You make out like you are a conservative, but your words are that of being self centered and greedy If that is how the conservatives are in your state, It’s no wonder it is BLUE.

    I’m not a conservative. I favor keeping abortion legal, I think restrictions of stem cell research, even by the government, should be removed. I don’t have a problem with gays getting married. I don’t think illegal narcotics should be illegal. On the other hand I’m in favor of shall issue CCW laws. I want lower taxes and less spending by the government. You see where I’m going with this? I think personal responsibility is a good thing, having Big Brother watching out for you is a bad thing.

    Your statements Herb strike me has indicative of not understanding economics at all. When the supply of something decreases then the price goes up. There is no evil cabal of corporations behind the price increase. At the same time it doesn’t mean there aren’t bad things about the oil/gasoline markets. There are, but they aren’t all the result of greedy grasping corporations.