In the wake of a disaster on the scale of Hurricane Katrina, it's hard to characterize much of anything as "good news." Not only did the storm likely inflict a profound loss of life, but it has left thousands of people homeless, jobless, and wondering what exactly they're going to do next.
That said, it would appear as though a lot of the country's Gulf Coast energy infrastructure remains basically intact after the storm. While some pipelines were knocked offline and about 30 energy platforms and rigs were lost, most companies appear to have escaped the storm with relatively manageable damage.
In the case of the refineries, the news is mixed, with some facilities likely offline for several weeks at a minimum in the wake of flooding. Roughly 10% of the country's refining capacity lies in the path traveled by Katrina. Given that the country was already running near the upper limit of refining capacity, significant time offline could lead to prolonged high gasoline prices and a potentially risky supply situation. While many facilities were impacted by power outages and flooding, and will continue to be affected by supply disruptions and labor shortages, the damage is not as bad as it might have been.
Good news and bad news
Most of the major facilities in the area were knocked partially or wholly offline. Eight major facilities, operated by Exxon Mobil, Chevron, Motley Fool Hidden Gems recommendation Valero
While Marathon expects to be running close to normal by the end of the Labor Day weekend, it could take a few more days for Shell and Valero facilities to come back online. More troubling, it looks as though it could take much longer to bring some other refineries back on line, including some owned by Chevron, ConocoPhillips
If that proves to be the case, around 5% of the nation's refining capacity could be idled for repairs. Other refineries around the country have already increased their production in response, but there's a limit to how much any facility can produce and it's not at all likely that increased production from refineries outside of the damaged area can fully compensate for the lost capacity.
Even when the refineries are back, it doesn't necessarily follow that everything (including gasoline prices) is going to get back to normal right away. The Gulf Coast region produces about one-quarter of the country's crude oil requirements and it will likely be weeks, maybe months, before production is fully restored. In the meantime, refineries will have to access other sources of crude -- whether through pipelines (assuming those are restored to full operation) or increased tanker shipments. What's more, while the president's decision to release oil and gasoline from the Strategic Petroleum Reserve will help, it's more of a stop-gap than a solution.
The fallout from the refineries
Given that crude oil isn't especially useful on its own, any disruptions to refining capacity quickly ripple through the economy. Immediately following the hurricane, crack spreads (that is, the spread between the cost of crude oil and the cost of gasoline) jumped up and gasoline prices soared in many parts of the country.
Though it's true that higher prices generally provide an incentive for companies to produce more, it's not quite that simple. Most refineries run pretty close to capacity as is, so there isn't a lot of excess capacity domestically or internationally to fill the gap -- no matter how high the price goes in the short term. Likewise, it takes years to build a new refinery, so even if the government eases back on the regulatory and permitting processes, it will be years before meaningful new capacity comes online. Nevertheless, it's not unreasonable to speculate that this sudden realization of the fragility of our energy infrastructure might encourage new building -- good news for the likes of Fluor
So long as there are bottlenecks in the system (be they supply-related or refinery-related), the price of refined goods will stay high. That's bad news for consumers, retailers, airlines, truckers, and just about everybody else. After all, there's only so much money floating around out there and when more of it goes into buying energy, less is left over for other purchases.
The impact on other facilities
Refiners aren't the only ones to see their operations impacted by the storm. Many companies engaged in the storage, gathering, and handling of energy -- otherwise called midstream operations -- have also been affected.
One of the largest midstream operators, Motley Fool Income Investor pick Enterprise Products
Another midstream operator, Williams
Although these are but two examples, they seem to be indicative of a broader trend. That is, the structural damage appears to be manageable in most cases and the main disruptions have been caused by the widespread power outages and flooding. Nevertheless, until energy supplies return to normal (either by bringing Gulf production faculties online or sourcing from alternative locations), the midstream operators likely won't be able to operate in a fully normal way.
The bottom line
At this point, I think it's fair to say that the exact state of the energy infrastructure is still up in the air. While the physical damage to facilities like refineries and gas-gathering operations wasn't as bad as some feared, the situation is far from "good." Production from the Gulf has been seriously curtailed, nobody knows when it will be back to normal, and it will take time for alternate supplies to fill the gap.
What's more, let's not overlook the impact from the tremendous human cost of the disaster. These refineries and other facilities are run by people whose lives have been turned utterly upside down in the past week. When you're still searching for loved ones or trying to figure out where to stay or find food, getting back to work at your refinery might not be such a high priority. Consequently, I do believe it is fair to wonder whether Gulf Coast operators are going to face some difficulty gathering enough manpower to get operations back to normal.
From the perspective of investors, I don't see a lot of long-term serious problems for the companies affected. No doubt the current quarter is going to be a mess for many refiners and midstream operators, and I wouldn't be surprised to see the problems extend into the next quarter as well. Past the turn of the year, though, I would be surprised if energy production and its associated operations weren't largely back to normal.
Valero is a recommendation of Motley Fool Hidden Gems. If you're interested in finding undiscovered companies whose shine has yet to show, take a free trial today by clickinghere. Enterprise Products is a recommendation of Motley Fool Income Investor, which is also offering a free trialsubscription.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).