Analysis: Katrina’s aftermath: chilly, blustery oil politics

Sept. 12, 2005
In a matter of days, Hurricane Katrina made energy a political issue again.

In a matter of days, Hurricane Katrina made energy a political issue again.

Beyond its immediate damage and the flooding that followed, the storm closed several Gulf Coast refineries and two major pipeline systems-Colonial Pipeline Co. and Plantation Pipe Line Co.-which move petroleum products to most markets east of the Mississippi River.

Wholesalers and retailers responded by raising prices at the pump to their replacement level-the estimated cost of replenishing inventories. It was enough to make US House Energy and Commerce Committee Chairman Joe Barton sound more like a Massachusetts Democrat than a Texas Republican.

“I think a very good case can be made that some retailers have taken advantage of [the consequences of Hurricane Katrina] and have begun to gouge the American people,” Barton said Aug. 31 in announcing a Sept. 7 hearing to discuss the storm’s impact on energy supplies.

He added, however, that the latest gasoline price jump may finally show the general public how fragile the national oil products delivery system is and that domestic production needs to grow beyond the Gulf of Mexico. “I think this shows our refinery capacity is inadequate. We have not built a new refinery in the United States in 30 years,” Barton said.

The Senate Energy and Natural Resources Committee already had its own hearing scheduled “to examine gasoline prices and factors contributing to current high prices such as global oil demand, constraints on refinery capacity, and increased speculation in the futures market.” Chairman Pete V. Domenici (R-NM) and Chief Minority Member Jeff Bingaman (D-NM) announced the hearing on Aug. 19, more than a week before Katrina made landfall. The hearing was moved to Sept. 6 from Sept. 8.

Government responses

The administration of US President George W. Bush, meanwhile, released 12.6 million bbl of crude oil from the Strategic Petroleum Reserve to refiners. The Department of Energy also established an online system at its web site for consumers to report gasoline prices they consider excessive. Within a week, it had received so many reports that it also opened a toll-free telephone line.

The Environmental Protection Agency issued a nationwide waiver allowing use of winter gasoline blends before the usual Sept. 15 switch instead of the summer formulation. It also is allowing use of diesel fuel with more than 500 ppm sulfur to provide additional fuel for emergency electric generators.

The Department of the Treasury and the Internal Revenue Service announced that dyed diesel fuel normally limited to off-road use would be allowed for highway transportation to help bring relief supplies to flood-stricken areas. The Department of Homeland Security waived Jones Act restrictions so foreign-flag vessels could assist in moving oil products between US ports.

In Paris, the International Energy Agency said its members would make 60 million bbl of oil and products available to help replace lost US supplies. “Member countries are aware that products, and in particular gasoline, will be the most useful contribution,” it said.

Finding solutions

US refinery and pipeline operators in the storm’s path obviously will try to repair and restart their operations as soon as possible to bring retail gasoline prices back below $3/gal. If they don’t accomplish this by Oct. 1, several congressional responses are possible.

The most likely will be authorization of drilling within the Arctic National Wildlife Refuge, a notion that was politically unthinkable just a year ago. Proponents skillfully kept it out of the 2005 energy bill and made it part of the budget reconciliation package that will be debated in the House and Senate next month.

Congress will approve it, even though it doesn’t address domestic refining capacity, because its members will want to be able to say they did something to increase supplies. Like it or not, motorists are a bigger voting block than caribou.

The refining question will be much harder. Assuming that Congress is even willing to wrestle with it, finished product imports probably will grow more quickly than domestic oil processing capacity in the coming months. New refinery construction will require more than congressional approval. It will need incentives and guarantees to attract the necessary investment.

Taxing questions

If Congress chose to provide those incentives with tax breaks, it likely would try to recover the lost revenue by bringing back some version of the Windfall Profits Tax, the political cost of ending federal oil price controls in 1981. Several members of Congress could find such a move irresistible to assure their reelection 25 years later.

The American Petroleum Institute apparently thinks this is possible. In its Aug. 31 markets briefing information packet, it included a bar graph that compared oil and gas earnings, as a percentage of total revenues in this year’s second quarter, to other businesses. Oil and gas came in at 7.6%, below the 7.9% average for all US industries, and well under 19.6% for banks and 18.6% for pharmaceuticals.

Nevertheless, Congress will still be in session in October as companies begin to report financial results for the third quarter. If those numbers show significantly bigger profits from higher crude oil and product prices, federal lawmakers could try to strike back. None of this considers natural gas, which traded above $11/MMbtu last week on the New York Mercantile Exchange.

Industry leaders have every right to feel apprehensive. It could be a chilly, blustery autumn.