Katrina's longer-term legacy could be energy glut: analyst

London (Platts)--31Aug2005

The aftermath of Hurricane Katrina will keep oil and gas prices high and
could push them higher in coming months, but perversely, Katrina's longer-term
legacy could be an energy glut and sharp price falls, US analyst Philip
Verleger said Wednesday. 
     US gasoline supplies will be cut initially by 1-mil b/d or more as a
result of refining capacity lost under the onslaught of Hurricane Katrina,
while diesel and distillate supplies will probably be reduced by 600,000 b/d,
Verleger said in a written report. These figures "assume Midwest refineries
can continue operating at full capacity," he added. 
     But Verleger also suggested that "refineries in the Midwest may soon have
to cease operations because their crude oil lifeline from the Gulf Coast has
shut down" and may well stay closed unless pipelines can be restarted. Some
pipeline facilities may remain idle until the power grid is rebuilt, he said.
     Verleger noted that as much as 2-mil b/d of US refining capacity had been
idled and, referring to Minerals Management Service estimates, that some 83%
of Gulf Coast natural gas production had been shut in. Repairs to facilities
will take months rather than weeks or days, he said. Blocked roads, standing
water, floods and lack of electricity will all contribute to delays, but the
greatest problem may be the loss of manpower.
     Verleger said some problems could be alleviated if the Environmental
Protection Agency were to relax regulations to allow companies nationwide and
not just on the Gulf Coast to sell winter-grade gasoline immediately. 
     "The EPA could provide further assistance by relaxing rules relating to
gasoline and diesel sulfur content. This action would permit importers to
bring in additional volumes," he said. 
     Verleger predicted that "the coming squeeze" in natural gas supplies
would equal or exceed that of 2002 when spot prices increased by 60% between
August and end-December. "This year we can expect a similar, if not larger
increase. A repetition of the 2002 experience would take natural gas to $15
per million Btu by the end of December," he said.
     Tightness in the natural gas market will spill over to heating oil
through arbitrage, Verleger said, predicting that as gas prices rise, power
system operators will turn to oil-fired generation, pushing up oil demand and
prices. Spot distillate prices--already at $2/gal--"will need to climb to
between $2 and $2.50/gal," he said.
     "Gasoline prices may have to climb to even higher levels also because
consumers in general have been insensitive to cost," he said. "In technical
terms, the price elasticity of demand is very low. This means it will take a
really large price hike to restore order to the market." 
     Estimating the national gasoline supply loss at 10% on a country-wide
basis but possibly as much as 15% east of the Rocky Mountains where the loss
is concentrated, Verleger said prices would have to double for consumption to
drop by 5%, and would have to triple to bring about a 15% cut in consumption.
     "Put another way, he said, "the 'market clearing price' for gasoline may
be $10/gal under current circumstances," he said.
     Verleger said he did not believe retail gasoline prices would reach
$10/gal, but he did predict that some parts of the US would see queues for
gasoline, though not for long.
    Verleger said he expected the economic impact of Katrina to be very severe
because consumers would be forced to increase drastically their spending on
energy. "Rising prices are going to require consumers to double expenditures
on gasoline, electricity, and heating fuels. Other spending will be cut and
recession will follow," he said. 
     Verleger predicted that Gulf Coast refineries and natural gas facilities
would come back on line just as demand was beginning to collapse. "This means
Katrina's legacy may be an energy glut like the one experienced in 1999," he
said.

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