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By Robert Rapier on Sep 13, 2008 with no responses

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.