Thursday, September 01, 2005

On Hurricanes and Oil Prices

There are reports of $6 per gallon gasoline in Atlanta (due to price gouging).

There is a possibility of a short-term shortage of gasoline in the eastern United States; this is due to a shutdown of pipelines that carried gasoline (among other refined products) into the East from New Orleans refineries. This shortage will be short-lived; there has been no damage to these pipelines, and they will be able to resume shipping as soon as they can again receive sufficient electrical power.

Oil and natural gas production (in other words, the wells and offshore platforms that drill for and collect raw crude oil and raw natural gas) has been hurt, and what's worse the Gulf fields are still recovering from damage incurred during Hurricane Ivan last year. Looking at oil industry news, it is hard to tell how much damage the oil fields sustained. Some companies are reporting no serious damage, while others are reporting major damage. Only time will tell. However, it seems that damage to the oil fields will not cause any serious damage or price pressure.

The problem is refineries. 10% of the United States refineries are located in and around New Orleans, and they have suffered serious damage, not to mention their workforces are now scatterered across three states as they and their families evacuated. And crude pipelines that supply crude oil from Gulf fields to Midwestern refineries are also shut down.

Almost all gasoline used in the United States has to be refined in the United States, both for economic reasons and in order to satisfy EPA emissions requirements.

So, from Econ 101: less supply coupled with constant demand will result in higher gasoline prices. As the extent of the damage is still being determined, and some of the market inefficiencies in the oil market (such as OPEC, environmental regulations, etc.), expect continuing functuations - and fairly big ones - in gasoline prices.

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