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Flirting with Disaster

Update: Governors in several states have now declared states of emergency due to potential gasoline shortages. One example:

Governor Riley Declares State of Emergency

MONTGOMERY – [Alabama] Governor Bob Riley on Friday afternoon declared a state of emergency for Alabama after he received new information from the U.S. Department of Energy that energy shortages will likely occur in the state due to Hurricane Ike.

The Governor’s declaration notes that “disruption of essential utility services, systems and severe energy shortages will likely occur.”

“I believe this new information means a threat to public health is a strong possibility due to the shortage of fuels,” said Governor Riley. “I deem it an emergency.”

Many of these declarations are designed to put anti-price gouging rules into effect, but I am reading more and more reports of actual outages being reported.

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It may seem like a given that gasoline prices would rise in the face of a hurricane that is shutting down a lot of oil production and refining capacity. Gas prices had been slipping recently as oil prices have plunged from the record highs set earlier this year, but are now expected to rise as supplies are crimped as a result of the hurricanes. To determine just how much gas prices might rise, I went to the best source of energy data around, the Energy Information Administration (EIA). Take a look at the current situation with gasoline supplies:

Now that is a situation that raises some concern. Total U.S. gasoline stocks heading into Hurricane Ike were 188 million barrels. If I scan back over the historical data (found here), it looks like this is the lowest gasoline inventory level since 2000. That level is also only a couple million barrels above the lowest inventories recorded in the past 20 years. So the gasoline price rise is likely to be sharp, especially if there is extensive damage to refineries around Houston.

Coming on the back of Hurricane Gustav, which also ran through major oil production/refining infrastructure – it is going to take a major effort to get all of that infrastructure back up and running or we are likely to start seeing gasoline shortages (and runaway prices). According to this report, the minimum operating level – defined as the inventory level required in the system before shortages start to occur – is 170 million barrels. If we put that in terms of our present gasoline consumption (9 million barrels per day), then the U.S. has two days of gasoline supply between current inventories and gasoline shortages. And according to Oil and Gas Journal, 21% of U.S. refinery capacity has been idled as a result of the storm (3.6 million bpd idled).

Simply put, we are flirting with disaster here. If the refinery outages are prolonged, or we see another storm entering the gulf any time soon, then there is a significant probability of seeing gasoline shortages. That means either 1). Prices will rise sharply; 2). Rationing will take place; or 3). You just won’t be able to get gasoline.

In the meantime, gasoline imports from Europe will likely pick up, but the response time for that is weeks. I would advise to keep your gasoline tanks topped off. And if we happen to dodge a bullet here, we really need to give some thought to how we prevent gasoline inventories from running low, especially during hurricane season. Maybe we need to consider establishing a Strategic Gasoline Reserve to go along with our Strategic Petroleum Reserve.

Footnote: For the best coverage of Hurricane Ike, especially as it relates to oil and gas infrastructure, see this story at The Oil Drum.

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September 13, 2008 - Posted by | EIA, gas inventories, gas prices, Hurricane Ike

9 Comments

  1. Just found your blog and I will tell you, I really enjoy it. It is good to see someone who actually knows what they are talking about discussing the energy situation in our country. Keep up the good work!

    Comment by Frankie | September 13, 2008

  2. This EIA link:http://tonto.eia.doe.gov/dnav/pet/pet_pnp_wiup_dcu_nus_w.htmmentions refinery capacity utilization. Can the non-Houston area refineries ramp up to near 100% utilization? It seems that refineries like to operate somewhere around 85-90% full capacity. I’m feeling upset with the refiners and their OPEC-like production output. We’ll have to blend more ethanol, I guess. Maybe nuke, wind, and solar will kick in any minute.

    Comment by Mike | September 13, 2008

  3. Can the non-Houston area refineries ramp up to near 100% utilization?Not really. Individual refineries can in fact ramp up to 100%, but overall utilization will always be lower because of maintenance problems at various refineries. Post-Katrina utilization rates have never cracked 95%, but it isn’t for a lack of desire.I just spoke to my wife in the Dallas area. She said rationing is already going on, and she saw a number of stations that were out of gas.RR

    Comment by Robert Rapier | September 13, 2008

  4. Robert-In your post, I think you meant to refer to Hurricane Ike, not Ivan; Ivan hit the northern Gulf four years ago and made quite a mess of Pensacola & surrounding areas.Thanks for the advice. The tanks are topped off. If I bike into work and keep other driving to a minimum there's no reason we can't go a couple of months without refueling, if it comes to that.

    Comment by Chris St.Clair | September 13, 2008

  5. I think you meant to refer to Hurricane Ike, not IvanI am posting today with a terrible cold, which has apparently short-circuited my brain. :-)Thanks for flagging that. It is fixed.Cheers, RR

    Comment by Robert Rapier | September 13, 2008

  6. I have at times wondered why we don’t have a strategic gasoline and diesel reserve. But don’t refined products store poorly? Can the non-Houston area refineries ramp up to near 100% utilization? Robert answered it, but its tough for a refinery to run at ‘nameplate’ capacity for any length of time. Crude slate issues, meeting regulations, catalyst life; so many issues.When it comes to maintenance there are refineries that are still running at lower rates due to Katrina and Rita. In my office we are doing some work to bring a unit affected by Rita back to its original capacity. Work probably won’t happen until 2010!

    Comment by Kiran | September 13, 2008

  7. The long-term effects of gasoline shortages could be salubrious. People might buy higher mpg cars, or even EVs. I wish we would migrate to higher mpg cars anyway, but oftimes consumers need a stiff kick in the pants. In this country we could so easily move to having surplus refinery capacity, just by taxing gasoline consumption, and driving demand down. Higher taxes? Never, even if it means national insecurity and economic suicide.

    Comment by benny "peak demand" cole | September 13, 2008

  8. Quite a few stations in the New Orleans area were out of gas today. A couple of the discount stations were closed. Stations that had gas were packed. I guess most folks heard about the $5 gas in the pipeline. The refineries made out okay. Chief problem is electric outtages. Most of Louisiana has electricity restored. I guess those linemen from all over the country will be heading to Port Arthur and Houston. I’ve got two brother-in-laws working at the Citgo refinery in Lake Charles. They didn’t shut down. My hunch is,gasoline goes from $5 back to $3 in the wholesale market Monday.

    Comment by Maury | September 14, 2008

  9. “Governors in several states have now declared states of emergency due to potential gasoline shortages.”Huh? By this line of thinking, the entire U.S. would have been in a continual state of emergency in the 1880’s when there was no gasoline at all — not just a “potential shortage.”

    Comment by Norman Conquest | September 15, 2008


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