The Hindu Business Line : Hurricane effect: US may face energy crisis

THE after-effects of Hurricane Katrina could leave the US facing a severe energy crisis because of imminent supply disruption in an already tight market.

Experts are coming around to the view that demand compression or demand destruction alone can save prices from spiralling up.

Gasoline prices in the US are poised for a dramatic price spike. Spot gasoline has already hit $120 a barrel, with September futures above $100 a barrel.

Experts see the US energy market being pushed beyond the edge. "The impact of Katrina has been to produce a significant discontinuity," according to an analyst who pointed out that spot gasoline prices in the Gulf Coast jumped by over 60 cents per gallon yesterday (Tuesday) to 285 cent a gallon which is the equivalent of $120 per barrel.

The September gasoline futures contract advanced by 41.39 cents to 247.45 cents per gallon, the equivalent of $103 a barrel.

The latest situation upstream is that some 1.4 million barrels per day of Gulf production is shut-in, representing 95 per cent of the usual output level, with 88 per cent of natural gas output also shut-in.

However, of more immediate significance is the situation downstream, according to Mr Kevin Norrish of Barclays Capital who said "Katrina has led to idling of nine refineries with combined capacity of about 2 million barrels a day, plus reduced rates in four other facilities".

In addition, the two key arterial pipeline systems that take oil products from the Gulf to the North East are currently out of operation. "It is in the downstream that the numbers start to look extremely bleak," Mr Norrish asserted, adding that bringing back refineries was likely to take time, given the power shortages, flooding and the general dislocation.

Adding up how many million barrels of cumulative refinery throughput there are that will not now happen provides some startling numbers. The bare minimum estimate is perhaps 20 million barrels (mb) with an upper estimate that could quite plausibly stretch 40 mb.

This in turn produces an estimate of lost gasoline production of perhaps 14 mb to 28 mb. "That loss is in the context of a refining system that was already having difficulty in producing enough gasoline, and where inventories had already fallen to a 21-month low," the expert pointed out.

In short, the numbers will not balance unless there is some significant demand destruction, and that is precisely the market signal that is now being sent, many believe.

Indeed, the gaps appear to have become large enough for energy markets to have now regained a very significant degree of upside potential.

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Hurricane effect: US may face energy crisis