As the second massive hurricane in less than a month plows across producing areas of the Gulf of Mexico and pulls within hours of major US refining centers, the need to adjust thinking about the oil market deserves notice.
That market isn't just about crude oil any more.
It never really was, of course. But crude oil got all the attention from the news media and politicians.
There are sound reasons for this. Crude costs account for the biggest nontax share of the delivered price of oil products. And the price of crude falls under the strong influence of production decisions by the Organization of Petroleum Exporting Countries, the political maneuverings of which provide an intriguing focal point for media attention.
That demand for crude has expanded enough to test production limits has been an important part the market story for at least a couple of years. It's an important reason crude prices have risen.
Less noticed until recently is that the same story applies to worldwide refining capacity. Demand was testing capacity limits even before Hurricane Katrina slammed refining centers in Louisiana and Mississippi and idled Midwest refineries by shutting down an arterial crude oil pipeline.
Now, plenty of crude oil is available. The challenges of the moment are crude quality and refinery distillation and processing capacities.
Less plentiful than crude in general is the light, sweet crude refiners need to meet growing demand for light, sweet products. Most of the extra crude entering the market is heavy and sour, much of which is moving into storage because refiners don't need or, in many cases, can't process it.
Operable refineries, meanwhile, are working at nearly capacity rates in the US and much of the world. A convenient imbalance of the moment is the chronic gasoline surplus developing in Europe, where diesel's market domination is growing.
When Hurricane Katrina hit, a lot of European gasoline began moving westward, supplemented by the International Energy Agency-European Union release of 683,000 b/d of gasoline, distillate, and fuel oil from strategic storage. The quick injection of product into the market was more important to the emergency response than the much greater volumes of crude that became available from strategic stock draws and OPEC's agreement to tap spare production capacity if needed.
To repeat, the oil market isn't just about crude. It isn't just about how much oil the world can provide in relation to how much it needs. It's about what kind of oil the world needs in relation to what kind refiners can produce.
And an important concentration of that capacity on the Texas and Louisiana Gulf Coast, is, as this is written, about to get clobbered again.
(Online Sept. 23, 2005; author's e-mail: email@example.com)