Riding the waves of Nature
Hurricane Gustav is bearing down on the Gulf of Mexico, making CIBC warn motorists that they should brace for gasoline to spike to over $5 a gallon as storms are shutting down oil production in the region.
Gas prices may go up, not because of the price of oil, but because of the supply of motor refined gasoline! We still have oil, but we don’t have refineries to refine the oil into gasoline.
A Shell spokesperson told me that so many people stopped to fill up their tanks before leaving that about ten percent of the gas stations ran out of gasoline. A Chevron person said that the usual 3-hour trip to safety is taking 8 hours.
For days now Hurricane Gustav has been building and the anxiety has grown with it. Oil companies have been evacuating employees for over four days, getting everyone to safety. They are also securing the platforms and refineries.
This involves closing the safety valves located below the surface of the ocean to prevent the release of oil or gas. During Hurricanes Katrina and Rita, the shut-in valves functioned 100 percent of the time, efficiently closing in production from wells and resulting in no major spills from the Outer Continental Shelf. Shutting-in oil and gas production is a standard procedure conducted by the industry for safety and environmental reasons.
According to Minerals Management Service (MMS), the U.S. Gulf Coast accounts for about 25 percent of domestic oil production and 15 percent of natural gas output. The Gulf Coast also is home to nearly half the nation’s refining capacity with Louisiana owning seventeen of those refineries. EIA data says that the Gulf (PADD 3) accounts for 32% of US gasoline production.
MMS reported on August 30, 2008, that approximately 76.77 % of the oil production in the Gulf has been shut-in. The estimated current oil production from the Gulf of Mexico is 1.3 million barrels of oil per day. It is also estimated that approximately 37.16 % of the natural gas production in the Gulf has been shut-in.
FEMA has just come on television, on August 31, 2008, and said that 96% of the production in the Gulf has been shut-in. Refining that oil gives 25 gallons of motor refined gasoline. That’s 43 million gallons of gasoline each day that we’re not producing.
Hurricane and fuels
During Hurricane Katrina and Rita, waivers were given so that fuels could be transported to different regions of the United States that usually required boutique fuels.
We can also import motor refined gasoline from other countries, but this adds about $15 a barrel. It is cheaper to bring oil over to the United States and refine it than to ship it over-refined.
When Hurricane Katrina and Rita hit in 2005 oil companies scurried up North to buy ethanol. According to John Urbanchuk, LECG, there is a 517 million gallon surplus of corn ethanol. EIA says we use about 400 million gallons of gasoline a day. Urbanchuk says that in the first six months of 2008 6.8% of gasoline was blended with ethanol.
Could we use that surplus of ethanol to increase the supplemental ethanol blend from 6.8% to 10%? We could if we had the blending and storage capacity, but according to Urbanchuk, we don’t have that ability. Urbanchuk says the industry can increase this to 8.4% in the very near term, but that won’t help today.
We have been conserving gasoline, Americans are using 200,000 barrels per day less than they did a year ago. Unfortunately, they are going to need to conserve more, or we will be dipping into the 20-day supply of gasoline or the Strategic Petroleum Reserve.
From a longer point of view, the only increase in domestic production has been through deepwater oil drilling in the Gulf. If these extreme hurricanes keep happening every three years there will be less incentive to drill.
It’s exhausting, financially and emotionally, to clean up and start over again, and it takes time away from bringing new fields on board.
When oil companies make a business decision to drill in the Gulf it is based on weekly production output. If oil companies have to factor in being unproductive for a week to a month because of hurricanes the business case isn’t as viable.