The headlines are filled with dire news of Hurricane Katrina's impact on the oil and gas industry, with pictures of long gas lines and stations charging more than $5 a gallon. Personally, I think the worst of the "gasoline shortage" may already be behind us, particularly if the American people do their part by reducing demand.
Daniel Yergin, chairman of Cambridge Energy Research Associates and commentator for CNBC, recently explained that the entire integrated system needs to be restored before we are totally out of the woods. Offshore platforms need to restore crude production, terminals and ports need to reopen to deliver the crude to the refineries, refineries need to return to service, power plants need to be running to drive all of the refinery equipment, and pipelines need to be online to get the product to the markets. Until the supply problems are corrected, demand needs to be curtailed.
The '70s all over again?
Meanwhile, the media and political leaders have acted as though there is nothing people can do about this temporary shortfall in our energy supply, as though $4 a gallon is a foregone conclusion. I hate to sound like Jimmy Carter in his "malaise" speech, but for the next month or so, Americans can really help themselves and the economy by temporarily cutting back on their fossil fuel addiction. What can you do? Carpool, check your tire pressure, obey the speed limit, walk to work, take public transportation, or ask your company if you can work from home one day a week for the next month.
Unfortunately, Americans don't have a very good record at voluntarily reducing their demand for hydrocarbons. Harold Ickes, Secretary of the Interior during World War II, faced public outrage when he tried to get Americans to voluntarily reduce gasoline consumption when the war started. He was only successful at reducing demand once ration cards were implemented. I doubt this situation will require such drastic measures, except in temporary regional shortages like those that appeared in the Southeast over the weekend.
Will there be a gas crisis?
The Southeast's gas shortage stems from regional pipelines knocked out of service and a lack of local refining capacity. If you draw a line from Pascagoula, Mississippi to Philadelphia, there is close to zero refining capacity anywhere to the southeast of that line. Therefore, more than anywhere else in the country, the Southeast is dependent upon the Gulf Coast's refining capacity, and the pipelines that deliver the refined products. The good news is that over the weekend, Colonial Pipeline -- which operates one of the largest pipelines through the region -- reported that 70% of their capacity (100 million gallons per day at full strength) had been restored.
Aside from the lack of talk about reducing demand, a great deal of the media reporting seems to focus on crude oil prices. I would argue that crude oil supply will be a minor problem. Roughly 1 million barrels per day of production is offline -- only 1.2% of daily international production. There's a debate about whether international production is reaching maximum capacity, and the loss of Gulf production will not help the situation. However, flexibility in the international distribution system and supplies from the strategic petroleum reserve will help soften the impact on crude prices.
The bigger challenge in the next couple of months: Eight refineries with a combined capacity of more than 2 million barrels per day are shut down, including facilities owned by Motley Fool Hidden Gems recommendation Valero
A few weeks before this disaster, American refineries were already running at 95.8% capacity. With 12% of refining capacity now offline, America is running a gasoline deficit of nearly a million barrels (42 million gallons) per day. When demand for refined product exceeds supply, prices at the pump will spike. It looks like four of the refineries will be up and running in a couple weeks, but some of the other plants may be out of service for much longer.
To address the refining issue, the government temporarily eased some EPA regulations. The subject regulations created several different regional blends of gasoline, made it difficult to move product across the borders of the regions, and made it impossible to import gasoline blended for foreign markets. By easing these restrictions, product can now move more easily to the places in the country with the greatest shortages, and we can import gasoline from Europe, where there is surplus refining capacity.
Overall, the picture looks a lot better than it did just a few days ago. Pipelines have restored a large volume of capacity, some refineries will be returning to service within a couple weeks, imported product from Europe will be arriving, and crude from the strategic petroleum reserve can help compensate for the lost Gulf production. Now, if only the American people can ease off the gas pedal for a few weeks.
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Fool contributor RobertAronen believes the oil, gas, and refinery workers will do everything they can to restore production as soon as possible, and thanks them for their enormous efforts ahead. He owns shares of none of the companies mentioned.