Dark Bilious Vapors

But how could I deny that I possess these hands and this body, and withal escape being classed with persons in a state of insanity, whose brains are so disordered and clouded by dark bilious vapors....
--Rene Descartes, Meditations on First Philosophy: Meditation I

Home » Archives » September 2005 » Ripple Effects from the Gulf Disaster...

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09/04/2005: Ripple Effects from the Gulf Disaster...

And to Bryan’s point about the Gulf Port: "I think Tierney needs to review what passes through New Orleans as it runs out while the port is shut and decide if he can live without it after the next hurricane," -- is this from Newsweek: Hitting the Economy by Robert Samuelson:

”We're getting a painful lesson in economic geography. What Wall Street is to money, or Hollywood is to entertainment, the Gulf Coast is to energy. It's a vast assemblage of refineries, production platforms, storage tanks and pipelines—and the petroleum engineers, energy consultants and roustabouts who make them run. Consider the concentration of energy activity. Oil production in the Gulf of Mexico accounts for nearly 30 percent of the U.S. total. Natural-gas production is roughly 20 percent. About 60 percent of the nation's oil imports arrive at Gulf ports. Nearly half of all U.S. oil refineries are there. Katrina hit this immense system hard. The shock wave to the U.S. and world economies—which could vary from a temporary run-up in prices to a full-blown global recession—depends on how quickly America's energy-industrial complex repairs itself.

No one knows the answer to that, because damage assessments of closed refineries and crippled production platforms and pipelines are still spotty...

... President Bush decided to release crude oil from the Strategic Petroleum Reserve, the nation's 700 million-barrel stockpile; but the immediate problem was the refinery outages and the resulting gasoline shortages.

At a minimum, this will hit consumers' pocketbooks—and perhaps their confidence. Before Katrina, Goldstein estimated that consumers' annual fuel bills this year would average about $250 more for gasoline and $400 more for home heating oil and natural gas than in 2004. Now he reckons those amounts will go up 30 percent to 75 percent. Costlier energy could adversely affect consumer spending, corporate profits and inflation—or all three. "We could be reaching a tipping point on consumer psychology, especially when people get their home heating bills," says Mark Zandi of Economy.com. "Those will be big."

Still, few economists are predicting a recession…

Even the direct effects of Katrina aren't entirely clear. Airlines will inevitably suffer from higher jet-fuel prices, and tourism to the Gulf Coast will plummet. But the impact on agriculture, aside from higher fuel prices, may be slight. In 2004, Gulf ports handled 22 percent of U.S. wheat exports, 71 percent of corn exports and 65 percent of soybean exports, according to the Agriculture Department. By themselves, the figures imply a nasty bottleneck for U.S. exports and global food supplies. The good news is that the big grain movements don't occur until late fall, after the harvests, and, by that time, Gulf ports may be working again. Finally, the rebuilding of devastated areas could actually boost the economy in late 2005 and 2006.

What clouds all forecasts is the precarious state of the world oil market. Even before Katrina, it was operating on a razor's edge. In the 1990s, global oil demand increased sluggishly, with annual increases averaging about 1.4 million barrels a day (mbd), according to economist Mary Novak of Global Insight. Then in 2003 and 2004, global demand—led by China—exploded, adding about 5mbd over two years. This exhausted most spare worldwide crude production capacity, she says. The resulting pressures pushed world prices from about $25 a barrel in 2002 to near $40 in 2004 and now to almost $70. Global refining capacity likewise failed to keep pace; it's increased only 700,000 barrels a day over the same period, says Goldstein.
These developments have profoundly altered global energy markets. "You have always had problems of pipelines going out, refinery explosions or weather-related disruptions," says Goldstein. But the system had ample spare capacity to produce more crude oil, refine more finished fuels or store them both. A supply shortfall in one part of the system could be made up in another. The resulting price changes were typically small, a couple of cents a gallon or less.
It is this remorseless logic—the old law of supply and demand—that poses the greatest peril for the American and world economies. The most obvious danger is that there will be other disruptions that compound today's scarcities: another damaging hurricane; a terrorist act in the Middle East; a politically inspired production cut (from, say, Iran); political unrest in a major supplier (say, Nigeria); an unplanned pipeline or refinery outage.

One way or another, the effects will ripple around the world. High prices and tight supplies are already expected to attract fuel to the United States from the rest of the world. If oil prices reach $100 a barrel, the United States would come close to a recession, according to a projection by Global Insight. The same depressing influences would also be felt in Europe, Japan and China, which are all major oil importers. Katrina might then perversely become the instrument by which oil prices collapse, because—being too high—they overwhelmed the world economy.

Karen on 09.04.05 @ 08:42 AM CST

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