Hurricanes and Gas Price Pains

The National Hurricane Center has a website which has some pretty interesting tracking tools, if you are curious about the status of tropical depressions, storms, hurricanes, typhoons, and cyclones around the world. In the next few days, they are probably going to get an incredible surge of traffic as people around the world watch the progress of two significant storms, Gustav and Hanna.

A tropical depression is a “baby storm.” It doesn’t have the “eye” that a hurricane does, nor does it usually have a photogenic spiral shape. A depression usually has sustained winds of under 63 km/h. Once a depression gets stronger, it becomes a tropical storm. It probably still won’t have an eye, but the spiral shape usually has formed by now. Maximum sustained winds for tropical storms are in the 63 km/h to 117 km/h. Once the storm becomes even stronger than that, an eye usually forms, and there is another name change. In most of the world, the storm becomes a hurricane. If the storm is in the northwest Pacific Ocean, it is usually called a typhoon instead of a hurricane, even though they are really the same thing. And if the disturbance is in the southern hemisphere or Indian Ocean, it gets called a cyclone.

There have been a number of famous hurricanes in the past century. One in India in 1970 was estimated to have killed up to a million people. Katrina devastated New Orleans in 2005, and was estimated to be the third costliest hurricane in history (based on current dollars). Hurricane Andrew in 1992 destroyed a large part of Florida, so much so that as a tree planter on Canada’s west coast, our amount of work surged two years later to reforest the blocks logged the previous year to rebuild after the storm.

For the last seven days, I’ve been watching the track of a storm called Gustav, which is going to be a household name by the end of this weekend. This is due in part to two reasons. First, it is heading almost straight toward New Orleans. Second, the largest and most concentrated part of the US energy infrastructure is in the Gulf of Mexico, just west of New Orleans.

New Orleans is a city that should not exist. The average elevation of the city is a couple of feet BELOW sea level. This was only made possible by a massive system of dykes, levees, and pumps, which began to be put into place in the early 1900’s. Up to that time, settlers stayed on higher ground, above sea level. So it appears that people were perhaps a little more intelligent a century ago than they are today. Katrina certainly reinforced that theory, when a major portion of the city was pretty much destroyed. However, it appears that some people learned their lessons, because the population of New Orleans today is probably only two-thirds of what it was before Katrina.

Why would people choose to live there, knowing that chances are high that another hurricane could come along and do same thing? Well, I can’t really criticize all of them. If you’ve lived there all of your life, it’s your home, regardless of the dangers or challenges of living there. And if you’re too poor to move, there isn’t much that you can do. It’s really only the people that are moving there nowadays of their own initiative that really need to give their collective heads a shake. I hope that this weekend doesn’t prove to be a lesson for them. Hopefully Gustav will lose strength or miss New Orleans, although I wouldn’t put any bets on that.

There is a possibility right now that Gustav might swing sufficiently to the west to avoid hitting New Orleans head-on. If that’s the case, then it’s just the rest of the United States that really has to worry. You see, just west of New Orleans, all the way over to Galveston, Texas and beyond, lies the richest energy production zone in America. The oil and gas production from the Gulf of Mexico is unbelievably critical to the proper functioning of the American industrial empire and financial infrastructure. You see, the Gulf is responsible for fifteen percent of American natural gas production, twenty-five percent of American oil production, and one-third of American refining capacity. The following graphic shows just how concentrated the production fields are. All those little blue and red things in the water are oil or gas rigs, and the line shows the current predicted path of the storm. You can also click on the graphic for a link to the original, larger-size version:





After Katrina and then Rita came through the Gulf in 2005, oil prices jumped overnight. More importantly, gasoline and diesel prices also skyrocketed. If a storm shuts down the region, imagine what will happen across the United States when one-third of America’s gasoline production is suddenly unavailable for a period of time. It’s a classic supply/demand problem – less supply for the same demand means that prices rise. And when prices of oil or gasoline rise, America’s economy goes into the toilet.

There are a few positive factors that could help. For one, maybe the storm will weaken, or veer off and miss the critical energy infrastructure. Even if only Gustav’s edge passed through the area, the industry would recover almost overnight. Also, the industry learned a lot from Katrina. For instance, at the time, most oil platforms were anchored to the floor of the Gulf with only eight mooring lines. Nowadays, twelve to sixteen lines are the norm. A storm would still damage a lot of the surface infrastructure, but at least there might not be so many loose oil rigs floating around the Gulf this time around. Needless to say, it is a bit of a challenge to tow an oil rig back into the exact proper location and tie the production pipeline back into the wells on the floor of the Gulf.

On a less positive note, there is a lot less "spare production capacity" in the world right now than there was in 2005. This is evidenced by the price increases in oil since then. Oil was less than $50 per barrel before Katrina hit, and immediately jumped to new records. Oil is down to around $115 per barrel today, but was almost at $150 per barrel earlier this year. Because of the lack of spare production capacity, the impact of a major industry shutdown this month would be far more serious than it was after Katrina. It's a good thing that the industry has taken major steps to protect its physical infrastructure from the possibility of further hurricane damages.

The amount of news coverage of the Democratic Convention this week, then of McCain’s VP pick, has certainly been astounding. It’s too bad that it has almost completely overshadowed the potential economic disaster that may hit at the start of next week.