Yergin on the Energy "Crisis"
Category: Oil & Gas...
Posted Friday, September 02, 2005 at 03:08 PM [GMT-6]

Daniel Yergin is the "go-to" guy in the oil and gas industry when it comes to understanding the big picture. Author of "The Prize: The Epic Quest for Oil, Money, and Power", a book that was published in 1993 but undoubtedly is still within reach of every oil company CEO in the world, when Yergin speaks -- or writes -- wise people pay attention.

He's got a wide-ranging article in today's Wall Street Journal in which he touches on a number of aspects of Hurricane Katrina's impact on the status of energy in our nation. Here are a few of the more interesting excerpts:

• On the importance of the SPR: But, fortunately, the Strategic Petroleum Reserve, with 700 million barrels, can compensate for an extended period for the missing oil. The SPR is certainly demonstrating its value here. Without it, people would be apprehensively asking how deeply into recession the resulting $80 or $90 a barrel oil would push the U.S. While the trigger for its use is not what was anticipated, the SPR is proving its role -- not as a tool of market management, but to offset a major disruption, protect GDP, and maintain the viability of our economy.


• On Katrina's impact on natural gas: In terms of price, natural gas has actually been hit more. Until this week, commercial gas storage, banked for the winter, looked comfortable. But now those inventories may not be built up sufficiently for a cold winter, a prospect that is already stressing the natural gas market. Over the last four days, natural gas prices are up 20%, while crude prices are, by comparison, up 6%.


• On the differences between today's situation and previous "Energy Shocks": Unlike the crises of the '70s or the Gulf Crisis of 1990-91, this does not involve just crude oil: It includes natural gas, refineries and electricity. The 1.5 million barrels of oil production capacity that has been "shut-in" -- closed down -- is much less than was lost to the market when Saddam invaded Kuwait. But although it has received less attention, 16% of U.S. natural gas is also shut-in; and 10% of our refining capacity is under water at a time when there is no slack at all in the world's refining system.


• On the importance of the Gulf of Mexico to the US energy supply: The full extent of the Gulf of Mexico energy infrastructure is hard to grasp. Altogether, about 800 manned platforms, plus several thousand smaller unmanned platforms, feed their oil and gas into 33,000 miles of underwater pipelines, a good part of which eventually reaches shore at Port Fourchon at the mouth of the Mississippi. That adds up to 35% of domestic oil production (including oil from state as well as federal waters) and over 20% of our natural gas coming from off-shore. Add to that the 10% of U.S. oil imports that flow in through the same corridor, plus the string of refineries and pipeline networks that sprawl along the Gulf Coast, and you have a complex that constitutes our single most important energy asset.


• On the importance of letting the free market do its work, and resisting the self-defeating strategies of price controls and arbitrary product allocation: Some of the refining capacity may come back quickly, while flooding may have put others out of commission for some time. Increased product imports from Europe, the Caribbean and Latin America can help offset the losses, but that will take weeks. In the meantime, calls for price-controls and allocations will likely grow. As painful as the price hikes may be, those calls should be resisted: The gas lines of the '70s were largely self-inflicted, the perverse result of controls. More constructive, and hugely less cumbersome and costly, would be clear communication to consumers. A package of responses, such as properly inflated tires, adherence to speed limits, consolidation of trips, and tune-ups, could cut gasoline consumption by 10% to 20%. This needs to be reiterated again and again, for modest restraint on demand is the quickest way to take the pressure off the market. The flexibility of markets and the resilience of the energy sector are the most effective antidotes to high prices and disruption. We can see markets working, also, in the substantial build-up of supply from around the world that will occur over the next few years.

Perhaps most importantly, Yergin suggests that we need a new strategy for securing our nation's energy supplies:

Was Katrina the wake-up call we needed to make the hard decisions, or will the crisis send us into an unending cycle of finger-pointing and blame-laying? I'm not placing any bets at this point.

Technorati tags: Daniel Yergin | Energy Crisis | Katrina & the Oil Industry