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August 29, 2005

Katrina and the Waves

As a side-note to all the excitement in New Orleans today, Hurricane Katrina has been making waves in the energy markets.  Oil hit $70 per barrel in overnight trading last night.  Gasoline futures topped $2 per gallon.  Natural gas prices spiked as well; at about this time last year, they were at about $5.50 per million BTU, but today they're over twice that high.

Prices may well decline in the aftermath of the storm, as the damage is assessed.  But pump prices throughout the US may well be affected going into Labor Day weekend -- especially if Gulf Coast refineries sustain any damage.

It seems I never get tired of saying this:  the Northwest's dependence on fossil fuels -- particularly oil and natural gas -- shackles our economy to forces over which we have absolutely no control.  The Pacific Northwest's oil comes mostly from Alaska; much of it is refined in Washington and BC.  Still, we're part of a global energy market, and price jumps anywhere else have ripple effects here.  Which means that a single hurricane, political shock, or terrorist incident in any major energy producing or refining part of the world now has the potential to siphon millions of dollars out of the region's economy.  It's high time we recognize that fact -- and long past time for us to do something about reducing our economy's vulnerability to, say, freak storms in the Gulf of Mexico.

Update: This Seattle P-I article says much the same thing.

Posted by ClarkWD | Permalink


Just returned from a bike tour of the San Juans, and drove my buddy crazy pointing out small farms with greenhouses, garden plots, windmills, solar arrays, etc obviously intended for family food production (sadly, land prices are too high relative to Planners' salaries).

Anyway, even with these enhancements, the Farmer's Market on Lopez only had a handful of vendors selling their products and I wonder how feasible it will be to produce enough food in environments with short growing seasons.

In other words, human societies have spread beyond their growing season (and climate tolerance, thanks to heating and air conditioning) and will they be sustainable once the reason for the spread has been removed?

Posted by: Dan Staley | Aug 29, 2005 12:26:41 PM

I caught the Crude Opinions thread late yesterday and wrote this for it. I'll just tack it on here since its related. I agree with you on the importance of decreasing our dependence on oil especially since I think we have seen the end of the era of low oil prices.

Will there be a price drop following the current increase similar what has happened in the past? I think this time it will be different. Those early crises were caused by supply curtailments by OPEC in response to wars or just to test their political and economic muscle. The crises were relieved when production was put back online. Also, coincidentally, during those years new non-OPEC production was starting to come in from large fields discovered in earlier decades, in the North Sea, Alaska, Mexico and other areas.

The situation now is quite different OPEC is producing flat out (one of their members, Indonesia, is no longer a net exporter). Suspicions are rising that even the Saudis will not be able to produce what they claim they can. Most of the large non-OPEC fields that were so productive during the 80's and 90's have reached and past their peak production. The discovery rate of new oil fields has been miserable for over a decade and it is pretty much agreed that total non-OPEC oil production will peak within a few years.

While there is validity to Matt's point about higher prices inducing additional discoverys and oil from other sources, these finds will come from smaller prospects that were previously shelved because, well, they were small. The problem is that the world uses the equivalent of more than two Prudhoe Bays every year. Fields of this size have never needed high prices to be economically justified. Oil companies have been looking for them for the last two decades with little success. We seem to be geologically constrained.

As for the Canadian oil sands, their large reserves are misleading because they do not easily translate into very high productive rates, certainly not enough to compensate for the decline in production from conventional oil fields. This is because oil sands are not liquid oil but the residue of oil after it rises to near the earth's surface and is partially biodegraded. Getting it to a useable form is essentially a mining project with heavy duty refining requiring, in the most commonly used method, lots of natural gas (which is nearing its own peak production in North America) and water, and leaving much waste. Current production is about 1 million barrels per day and each increment of additional production will need huge capital investment and long lead times. In other words, things are not so rosy when you have to rely on oil sands for new oil. Similar arguments can be applied to oil shale, gas to liquids and other alternatives.

This, then, seems to be the situation the financial markets have been sensing with high prices not only in the spot market but the futures as well, as Clark pointed out. I think the fundamentals are in for a permanently higher oil price. There will be fluctuations depending on all of the factors that influence demand, supply and speculation but any lower price level, I feel, will be temporary.

Posted by: WayneS | Aug 29, 2005 5:12:28 PM

Yes, but what about the title of this post? Clark, have you no shame? Once that song gets stuck in your head, it takes *forever* to get it out. Very much like the oil in oil sands, actually.

Posted by: Michael | Aug 29, 2005 5:31:17 PM