Prof. Hamilton on Katrina & Oil & Gasoline Prices
Prof. Hamilton has a very long post that looks at the impact of Hurricane Katrina on gasoline, natural gas, and oil prices. First off, Prof. Hamilton was surprised at the change in oil price (about a $1),
Some analysts have compared these production figures with total U.S. crude production, but that is certainly not the correct comparison. The reason is that it is a world market for oil. Regardless of what happens in the Gulf of Mexico, oil will sell for essentially the same price in New York as in Rotterdam. Because lost crude oil production currently appears to be a relatively modest component of global supply, the net impact on the price of crude was unimpressive. Even so, I was surprised that the increase turned out to be so small, if the production figures cited above prove to be accurate.
I’m a bit surprised as well. As for natural gas and gasoline which are national and local markets respectively Prof. Hamilton writes the following,
Natural gas and gasoline are very different stories, however. Natural gas is largely a domestic market, and the price of an October natural gas contract on the New York Mercantile Exchange shot up 14% today. And although gasoline could be an international market, for the United States, it isn’t. In fact, it’s not even a national market, given the fact that Americans can be required by law to purchase a different kind of gasoline on a county-by-county basis; (see the map below and discussion of its significance here). Because the market for gasoline is so local, the disruption of the output of even a single refinery can have a big effect.
I think this is exactly right. The problem with gasoline is two fold. First, there aren’t that many refineries anymore. Building new refineries just isn’t going to happen in the next 10 years is my guess without some major shift in people’s thinking and some sort of major push by the Bush administration, and I don’t think the latter is going to happen. The second problem are all the gasoline additive requirements (click here to see a really cool map of different blend requirements). This latter fact transforms the gasoline market from a national market to a series of local markets. Hence a single refinery going down for unplanned maintenance could cause some noticable price spikes. As I noted earlier, several refineries in the New Orleans area are likely to be out of commission for the indefinite future and that is were the big impact will come, IMO.
Another problem noted by Prof. Hamilton that I failed to consider is that the Louisiana is also a major point of entry for oil into the U.S. These too are likely to see very reduced capacity which will mean that the refineries that are currently in operation wont necessarily be getting as much oil as they could refine.
The Louisiana Offshore Oil Port, the biggest U.S. oil import terminal, stopped making pipeline shipments to refineries from its onshore facilities. The port is 20 miles off the coast and handles about 1 million barrels of crude oil a day, or 11 percent of U.S. imports–Bloomberg
Bottom line, look for a pretty sizeable jump in gasoline prices starting pretty darned soon. Prof. Hamilton notes that September and October gasoline delivery contracts are up 13 and 11 cents respectively. I wouldn’t be at all surprised if they go even higher today.
What are some of the things that can be done to mitigate these problems? Build more refineries for one. Another would be to standardized the gasoline additives so that they are uniform throughout the nation. Both of these would help reduce volatility in the gasoline markets. Do I expect any idiot politician in Washington to suggest something like this? Not really. More refineries would likely mean more competition and more competition is bad for oil industry profits. Oddly enough Bush and Cheney are on the same page as the environmentalists, but for different reasons. Similarly I don’t expect much to come of any attempts to standardize gasoline additives. The first problem is that various states/areas are going to want their particular blend to be the standard. Hence there will be lots of arguing over that and whatever standard is chosen will likely create both winners and losers. Thus, this would not be a simple change in practical terms. In short, much of the current price hikes we have inflicted on ourselves. Blabbering and nonsense about foreign oil is just that, blabbering and nonsense (at least in this instance).