See also the transcript of the Bartlett/Simmons/Deffeyes/Heinlein discussion (it's very long, I'll try to do a summary in the near future)
http://www.energybulletin.net/9242.html
http://www.energybulletin.net/9245.html
http://www.energybulletin.net/9248.html
1) Rita damages worse than announced
I mentioned this yesterday already, with the big article on the damage to the exploration rigs:
The path Katrina took was through the mature areas of the US Gulf where there are mainly oil [production] platforms. Rita came to the west where there is a lot of [exploratory] rig activity
but it appears that it is getting worse and worse:
$6bn storm bill could see premiums rise 400%
Richard Harries, energy underwriter at Atrium, said the cost of insuring offshore facilities in the gulf, including full cover for potential hurricane damage, could rise by 300-400 per cent. However, rate rises could be stemmed by underwriters limiting the cover they provided against potential hurricane damage. The cost of insuring offshore facilities in regions other than the Gulf of Mexico could rise by a minimum of 20-25 per cent, he said.
The latest estimates put total losses from damage to offshore facilities from Katrina at $4.5bn-$5bn, of which $2bn-$3bn could fall across the whole of the commercial insurance market, Mr Harries said. Estimates indicated that the commercial insurance market could incur another $2bn-$3bn in losses from Rita.
"Rita has started off worse than Katrina," in terms of damage to offshore facilities, Mr Harries said. While Katrina had lots of smaller-value platforms in its path, Rita had affected fewer, but higher-value platforms.
So Rita is going to cost as much as Katrina in terms of insured damage to the offshore oil industry - and this will have a significant impact on future production costs. Between finding new rigs, paying for temporary accomodation for its employees and paying for the increased premiums, the oil industry is seeing its costs skyrocket. Remember this graph, which was prepared before Katrina:
Oil - and gas, never forget natural gas - production costs are increasing massively, and bringing the floor on energy prices at increasingly high levels.
2) Houston evacuation worsened gasoline shortages
White House moves to prevent run on petrol
The US petrol market lost close to 80m gallons of petrol in the evacuation of about 3m people from Houston ahead of Hurricane Rita. Although Houston was not hit, forecasters had projected that the fourth-biggest US city would be in the eye of what was then a Category 5 hurricane. That boosted regional demand 4-5 times higher than normal as residents fled, Baker Institute research shows.
In the end, Hurricane Rita released its fury on the Gulf of Mexico drilling area, damaging more offshore rigs than any storm ever, before hitting four refineries on the Texas/Louisiana border.
While damage to rigs, which drill for oil, will drive up future fuel prices, the damage to refineries - on top of the run on petrol in the evacuation - is likely to have an immediate impact at a time when Americans already are seeing petrol for $3 per gallon at the pump.
(...)
The storm cost the US about 5 per cent of US refining capacity, even as another 5 per cent remained offline following Hurricane Katrina. Perhaps more importantly in the short term, however, is the immediate burden placed on the system by last week's massive evacuation of Texas and Louisiana.
It pushed national consumption of petrol to about 6 per cent more than for the week of Labor day, which is considered peak driving time in the US, according to the Baker Institute. That was about 20 per cent higher than normal for this time of year.
Researchers say continued heightened demand will put additional strains on the US petrol distribution system, which was tight even before hurricane season began, with refineries running as close to full capacity as possible. The nation has no refined stores, so the loss of petrol from the evacuation alone could result in higher retail prices.
(...)
Bob Linden of PA Consulting noted that heating oil is going to come into the limelight in coming days, when people begin ordering fuel oil for winter. Refineries that normally would be building inventories of fuel oil have been instead replenishing petrol supplies lost in the hurricanes and the evacuation. That has set the stage for reduced supplies of heating oil that will drive up prices as winter approaches.
Read the article also about the WH's reaction and the political difficulties to tell the truth to Americans. And yet... we are currently seeing emergency reactions to the recent problems, and these are only pushing the real crisis by a few weels or months. We are drawing on emergency supplies, not filling up the normal winter stocks, while running the system at full capacity. It all points to more tensions in the market. Now is the time to be proactive about it.
See the end of the diary for a call for action.
3) Why the oil companies are not gouging us: the refining crisis
Now I'd like to come back again on the "price gouging" accusation against oil companies. I've already written about it (including in yesterday's Cheers ans Jeers thread), but here's a big article on the topic which explains what has been going on:
Blockage in the pipeline
The bottleneck in refining represents a ceiling on production that analysts say could take a decade to overcome, meaning that high prices at the petrol pump could be here to stay.
(...)
Even before Hurricanes Katrina and Rita temporarily took nearly one-quarter of US refining capacity off-line, the global refining system was stretched. According to figures from BP, the oil major, global average refinery utilisation increased to 87 per cent in 2004, the highest level for more than one-quarter of a century. In the US, refineries have been running at a 95 per cent utilisation rate this year, according to Purvin Gertz, the oil consultancy. That level, up from a low of 68.6 per cent in 1981, is considered about the maximum achievable on an annual basis.
One way to measure the soaring demand for oil products is to measure the price gap between a barrel of crude oil and a barrel of refined product, called "crack spreads" in the industry. "The [petrol] crack recorded over the last two weeks has broken all records," said Philip Verleger, an independent energy economist. "Two weeks ago, margins were nine times higher than the 20-year average."
How did we get here? After a construction boom in the 1970s, many refiners were caught by the sudden downturn in demand in the 1980s and profit margins all but vanished. During the 1990s, the refining industry went through a painful process of consolidation, with oil companies selling off plants they saw as outside their core business. Refining margins hovered close to zero, choking off investment in the sector.
(...)
"The US refining and marketing industry has been characterised by unusually low product margins, low profitability, selective retrenchment and substantial restructuring throughout the decade of the 1990s," the US Energy Information Administration summarised in 1999. "Costs involved in complying with environmental laws have grown substantially during the period and have also affected the profitability of the domestic industry. Consequently, refiners' abilities to recoup their investment have been impaired."
At the same time, the quality of the oil that refineries receive has been changing, requiring further outlays. As supplies of easily refined "light, sweet" crude from places such as the North Sea dry up, oil companies are having to upgrade their refineries to handle the heavier and more sulphurous "sour" crude that Opec producers now have to offer.
(...)
Suddenly, for the first time in decades, the refining business is hot - one of the most profitable segments of the global energy business. In the past four years, US refining margins have gone from close to zero to around $23 a barrel. After Hurricane Katrina, margins soared to around $40 a barrel. (...)
So, given the promise of high returns, surely oil companies are falling over themselves to invest?
The article goes on to describe the obstacles to buidling new capacity:
- regulatory constraints. Finding new sites is not easy, although that could be made simpler by government intervention;
- refineries are 20 or more year investments. You do not base such a long term investment on short term prices, but on long term scenarios. Oil companies have increased their long term outlooks for oil prices (going from 15-18$/bl to 25-30$/bl in the past 5 years, a significant change), but it will be harder for refining margins, which were essentially at zero for the past 20 years.
- in any case, any investment decided today will not be available before about 5 years, and will do little for today's prices.
Tempting though it may be for governments under pressure over soaring fuel prices, state intervention is unlikely to help: any new refineries could take between five and ten years to come on-stream. In the meantime, refinery capacity could limit the consumption of oil products and, in turn, the production of crude. Consumers may simply have to adjust.
"The grim reality is that it will take at least a decade [to solve the bottleneck]," said Mr Simmons. "All we can do now is mitigate against getting deeper in a hole."
Shortages are pretty much a certainty in the next 5 years, as little capacity will be added worlwide before 2009, on the basis on investments already under way. And shortages will lead to either skyrocketing prices or rationing.
In the discussion panel I linked to above (the Bartlett/Simmons conference), they note that light oil has already peaked, and refineries need to invest to adapt to 'sour' (sulphur-rich) crude. These investments are even more urgent than capacity increases, as they are needed to maintain capacity in the face of changing oil supply patterns.
4) US manufacturers losing out because they did not focus on energy efficiency
America gets taken to the cleaners
As it happens, Americans are already less profligate with energy than they used to be: you just have to go indoors to realise. There may be a sports utility vehicle in the driveway but the washing machine, the air conditioner and the refrigerator use less power than in the past.
(...)
The problem is that US appliance makers have their roots in the energy-guzzling past. While Americans were happy with inefficient air conditioners, US manufacturers such as Goodman, Fedders and Frigidaire dominated. When they changed their minds, the barriers fell: imported room air-conditioning units went from a 20 per cent share of US sales in 1998 to 97 per cent in 2003.
A similar thing is happening with washing machines. Until recently, Asian and European consumers bought compact front-loaders while Americans were exceptionalists who wanted big machines that were easy to load. They stayed loyal to the top-loading configuration invented by Maytag in 1922 that requires 40 per cent more water and energy.
(...) the trends are ominous: overseas companies captured 14 per cent of US washer sales last year and sales are growing at 75 per cent a year.
This is partly due to the familiar reasons why Asian manufacturers do well in western markets. They are low-cost producers with smaller wage bills and fewer of the healthcare and pension expenses that trouble US companies. Maytag has been stuck in a depressing cycle of cutting jobs to offset rising raw material prices.
But there is another factor: foreign companies are more committed to energy-saving technology than their US counterparts because their domestic markets have demanded it for far longer. (...)
There is a parallel with Detroit, which has gone through periodic bursts of enthusiasm for smaller cars with lower fuel consumption but has always relied for the bulk of its profits on gas-guzzlers. Hybrid engine technology, which US companies are rushing to embrace, emerged from Asian manufacturers such as Toyota and was initially dismissed as a fad that Americans would shun.
US manufacturers are getting hit because they are not used to provide energy-efficient products. So higher energy prices are likely to lead, among other consequences, to increased imports and more "restructuring" in the industrial heartland.
Thus:
5) A note about making the Chinese pay for NOLA's rebuilding
Risk of rebuilding New Orleans in deluge of debt
In the wake of President George W. Bush's recent speech in New Orleans, I have been wondering if anyone has asked the Chinese how they feel about his decision to spend "whatever it costs" to rebuild the city. After all, they are the ones who will have to pay for it.
(...) the entire cost will be added to the $350bn federal budget deficit, driving it close to $600bn. (...) more than 75 per cent [of this deficit] is financed by foreign central banks, among which the People's Bank of China will soon pass the Bank of Japan as the biggest lender.
(...)
The entire US economy is on life support from the PBoC and the BoJ. In 2004, according to the Bank for International Settlements, central banks funded 75 per cent of the US current account deficit. This year, the PBoC alone is likely to cover nearly 40 per cent of it.
(...) Americans are consuming more than they produce and importing more than they export. The resulting trade deficit will be close to $800bn this year. To cover this gap, the US must have a net inflow of capital from abroad of more than $2bn per day and that must come mostly from China and the other Asian countries whose trade surpluses mirror the US deficit. Any slowing of this flow could cause a decline in the dollar, a rise in interest rates, a slowdown in growth, a rise in unemployment and declining home equity and household wealth - in a word, a recession, if not a depression.
So, the USA are losing control of their ability to pay for NOLA reconstruction, buy energy efficient equipment, and avoid recession, and are now relying on the goodwill of foreigners, starting with China, to keep on bailing them out. They've done it because they hitched on the runaway US train to grow their own economy, but it's becoming increasingly unsustainable. And it's all linked to energy.
This diary is already long enough, so I'll stop there (remember, this is just from one paper, one day), and come to my request to you:
6) My call for action
In their last election campaign, Blair's Labour party provided their programme in the form of a credit-card sized manifesto (a "pledge card"), with 6 main commitments on it that made it all very simple and digestible. They then had a slightly longer manifesto detailing what they meant. I would like to prepare the same for Democrats, and would ask for your help there.
What's needed is simple:
- a small number of bullet points with simple statements on energy (like "energy is a vital national security issue" "encourage renewable energy to create jobs and ensure stable supplies" "guarantee sustainable access to energy to everybody" and so forth
- a slightly longer manifesto (which should fit on one or two pages) outlining what Dems think of the current situation, what theythink needs to be done, and why they should be trusted to solve the problem.
I'll have a go on my side, using the ideas that you may provide, and use future diaries so that we can polish it together.
Thanks!
