Energy prices have stabilized at high levels in the weeks following the damage to the U.S. petroleum infrastructure wrought by hurricanes Katrina and Rita. The natural gas market, which lost more than 20 percent of domestic production from the Gulf following the storms, has seen dramatic price increases in the cost of the product.
While the loss of more than 1.4 million barrels per day of crude oil production from the Gulf states can be rather easily replaced by other sources, such as the nation’s strategic petroleum reserve and imports from other countries, natural gas is difficult to transport outside of the domestic pipeline network that has been built over the years. The hurricanes disrupted the production of more than 8 billion cubic feet per day of natural gas. Natural gas can only be economically shipped from overseas in the form of liquefied natural gas (LNG). The United States has only four LNG ship terminals at the present time, one of which is in the Gulf. In addition, the global fleet of LNG tanker ships is already contracted out for several years.
Prior to the hurricanes, the United States had already tipped into becoming a net importer of natural gas, importing about 4 percent of the country’s needs in 2004. The result is a major increase in the cost of this fuel. Also, use of this gas is not optional for many sectors of the economy including electric utilities and home and commercial heating and cooking. Analysts are predicting an average increase in gas-fired heating bills this winter of nearly 50 percent!
Crude oil prices have settled into the mid-$60 range since peaking at more than $70 per barrel immediately following the storms. The mid-October price for crude is down slightly from earlier in the month. As of the date of this article, crude was selling for $62.40 bbl. (a barrel of crude contains 45 U.S. gallons). Gasoline prices have also come down slightly. This is largely due to reduced demand as a result of high prices and the return of about half of the Gulf state refining capacity initially knocked out by the storms. An interesting side note to the world’s energy drama came two weeks ago with the announcement by the Saudi oil minister that the Saudis have much more oil in the ground than originally estimated. (This is covered in “Oil Reserves Estimated to Be Larger Than Previous Calculations,” another eNews article in this issue.)
Diesel fuel, on the other hand, has increased to an average price of about $2.50/gal. (not including taxes). On the East Coast, this equates to a cost difference of 20 to 50 cents per gallon. Diesel fuel is derived from the same petroleum fractions that are needed for the production of heating oil and jet fuel. As our national heating stocks are already lower than they should be and climatologists continue to predict a colder than normal winter, the strong demand for heating oil continues to drive up the price of diesel as well.
Automakers are starting to realize the impact of expensive energy also. Sales of pickups and large SUVs are down sharply, while the resale value of used, compact cars sold at wholesale auctions have started to rise.
A final note and warning following Katrina and Rita: It has been estimated that more than five hundred thousand vehicles suffered water damage during the storms. It is likely that many of these vehicles will be “freshened” and will find their way into the car market. Buyers should be extremely cautious when making a used vehicle purchase. Electronic components such as fuel computers and other solid state devices may work for several months after being immersed in salty water, but the salts will remain in the modules and will eventually destroy the electronic circuitry. Unscrupulous operators have figured out ways to “wash” titles so that damage disclaimers and “Junk Vehicle” notices may no longer appear in the vehicle’s history or documentation. If you are planning to purchase a used vehicle soon, you may want to take it to a trusted technician for a close inspection!