Jun 6 2007 2:05PM | Permalink | Email this | Comments (1) |
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On the sixth day of the hurricane season Cyclone Gonu in the Indian Ocean is a rude reminder that oil supplies, construction demand and construction costs remain at risk to severe weather disruptions. It is not just the Mississippi delta and Houston we have to be concerned about. Although these are the largest coastal oil patches, there are large coastal oil facilities in the southern Caribbean, the Nigerian Atlantic coast, the North Sea between Scotland and Norway, the Middle East and the East Indies.

None of these areas suffered a serious loss of oil supply last summer. Cyclone Gonu now appears likely to only cause a few days delay in oil shipments and little if any loss of oil production. It might have been much worse. Gonu weakened from a category 5 to a category 1 storm before it headed up the Strait of Hormuz, the shipping lane for 40% of the worlds’ oil. The marginal impact on oil futures markets suggests that no serious damage is expected to oil terminals, tankers or the small number of oil production facilities near the coast.

Could the next oil patch hurricane have as much impact on oil supplies and costs as Hurricanes Katrina and Rita did in 2005? Yes, if the disruption is in the US Gulf but no if it is elsewhere. The US Gulf coast is more prone to hurricanes and has much more offshore oil and gas production as well as refining capacity.

The National Weather Service is again predicting an above normal hurricane season with 7-10 Atlantic hurricanes. While they were wrong last year, they are right most of the time.The US energy industry is less prepared to absorb supply disruptions now than it was at the end of August 2005. Considering demand changes, crude oil inventories are about the same as in August 2005 but gasoline inventories are down 10% and likely will become less adequate by August with the peak driving season in the next two months. Natural gas stocks are also 10% under two years ago. This is the lingering impact of the 2005 hurricanes. Some offshore producing fields are not yet repaired; others never will be reopened. One Gulf Coast refinery has not reopened; many are operating below capacity, catching up on maintenance or awaiting repairs. Separately, a large Chicago area refinery is partially shut after a fire.

A supply disruption confined to crude oil supply elsewhere in the world would be painful but less so than in 2005. A supply disruption again in the US Gulf would again include crude oil, natural gas and refinery capacity for gasoline and petrochemicals for plastics. It would take less of a disruption in 2007 than in 2005 to yield the 2005 level of supply shortages and price increases.