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August 31, 2005
Dept. of Energy Report: Oil Basically a Big Mess
Every week, the Department of Energy publishes a report called “This Week in Petroleum”. In the latest issue, the DOE explains the depths of the problems facing the refinery situation in Louisiana.
Unfortunately for many oil consumers, we will soon see what happens when a supply shock occurs when prices are already at high levels. But the extent to which analysts’ fears are realized will largely depend on how long petroleum infrastructure remains offline.
Oil production platforms, import terminals, pipelines, and refineries were affected as a result of Hurricane Katrina, whose path took it directly over many production facilities in the Gulf of Mexico as well as many refineries in Louisiana, as well as one major refinery in Mississippi. As a result, crude oil prices and petroleum product prices have spiked over the last two trading days. However, unlike Hurricane Ivan, which was a major hurricane that affected oil facilities last September and had a more lasting impact on crude oil production in the Gulf of Mexico, it appears that Hurricane Katrina may have a more lasting impact on refinery production and the distribution system.There are several factors currently inhibiting refinery production. First, employees that were evacuated from their homes need to return to work.
Another factor impacting refinery operations is the loss of electrical power
Finally, refiners will need to perform damage assessments to determine what, if any, repairs are needed. Some refineries reportedly have been flooded, which could do serious damage to some of their units. The extent to which flooding may have caused damage to refineries will be a key barometer that market analysts will be waiting to hear in the coming days.
I believe this morning, the Governor of Louisiana called for an evacuation of all people remaining in New Orleans. She mentioned the basic problem they face is where to put people. In short, people are spread out all over, so finding them may be difficult.
I would assume the oil companies probably have knowledge of where their respective employees are. However, Katrina has also affected communications facilities, so simply contacting employees could be a problem. Then there is the issue of getting employees to and from various places. While the companies do have strong transportation infrastructures, it will still take time.
Then there is damage assessment. I am no expert on the effects of flooding on an oil refinery. However, several pictures I have seen showed refineries more or less underwater. This can’t be good. I would hazard a guess that at least one facility has experienced some kind of major damage, simply based on the laws of probability.
I would guess the refineries’ electrical power will be a top priority because of the national implications. Again, however, there is the issue of time. The longer the refineries stay down, the dire the situation becomes.
In short, it’s basically a big mess that could really hurt in the short-term.
Posted by Hale Stewart at August 31, 2005 01:02 PM | Permalink
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Comments
Unfortunately I think the process for getting the oil refineries going again is much more complicated. I don't think very many people know exaclty where their employees are, even many family members are trying to track down loved ones are. Many people are being evacuated out of the area anyway, as health conditions worsen due to sewage, chemicals, etc. so employees could be scattered across many states at this point. Some may not even return.
I've heard that it could take weeks before the actual damage done to refineries can be assessed. Then repairs will have to be made to regain basic function, then the ongoing process of slowly climbing back to full capacity, which could take a year.
Even if the refineries are able to be brought up again, there's the issue of where the employees stay. Most houses and cities along the coast are simply obliterated. There's no infrastructure to support families and what remains is generally severely damaged. I guess employees could be temporarily housed at the refinery sites, but it will take a very long time before the area can truly function as it once did.
Still it's good to know that Bush cut his vacation two days short to go back to work.
So far, I've heard the worse case scenario for gas is $5 per gallon, which sure is making hybrids look better all the time. Honestly, Katrina is a warning of how dependent the nation is on oil, and how one event can affect the entire country. There is the strategic oil reserves that Bush is saying he will tap, but that's only a short term solution. Recovering from the destruction is going to be much longer term, and oil prices may not ever come all the way back down to what they used to be. Katrina is also a warning for the necessity to protect the outerbanks along coastlines from erosion and to save wetlands from development that in turn protect the mainland. Sometimes leaving pieces of land in their natural state can be worth more in the long run than developing in the name of "progress."
Posted by: Marc Olivier at August 31, 2005 10:55 PM