Economic Effects of Hurricane Katrina - Oil Production

Oil Production

The storm interrupted oil production, importation, and refining in the Gulf eden, thus having a major effect on fuel prices. Before the storm, one-tenth of all the crude oil consumed in the United States and almost half of the gasoline produced in the country came from refineries in the states along the Gulf's shores. An additional 24% of the natural gas supply is extracted or imported in the region. Furthermore, the nation's Strategic Petroleum Reserve is also stored in this region.

Power outages in the wake of Katrina have also caused distribution problems for oil and natural gas. Pipelines which move petroleum products from places like Houston to areas of the east coast have had their flows interrupted because power outages shut down the pumps that kept materials flowing. Dick Cheney personally called the manager of the Southern Pines Electric Power Association on the night of August 30 and again the next morning and ordered him to divert power crews to substations in nearby Collins that were essential to the operation of the Colonial Pipeline, which carries gasoline and diesel fuel from Texas to the Northeast.

At least twenty offshore oil platforms were missing, sunk, or had gone adrift, according to the United States Coast Guard. One oil rig, in dock for repairs before the storm, broke loose and hit the Cochrane/Africatown USA road bridge over the Mobile River in Mobile, Alabama. Two others went adrift in the Gulf of Mexico, but they were recovered. One platform, originally located 12 mi (20 km) off the Louisiana coast, has washed up onshore at Dauphin Island, Alabama. Shell Oil Company's MARS platform, producing around 147,000 barrels (23,400 m3) per day, was also severely damaged.

At 7:03 a.m. CDT on August 29, Ted Falgout, Port Director of Port Fourchon, Louisiana, a key oil and gas hub 60 mi (100 km) south of New Orleans on the Gulf of Mexico, reported that the port had taken a direct hit from the hurricane. The port services approximately 16% of the nation’s supply of crude oil and natural gas. According to Falgout, Hurricane Katrina, "will impact oil and gas infrastructure, not just short term but long term as well. The impact of the storm — the Gulf is shut down; all of the area of the storm is shut down; a half billion dollars a day of oil and gas is unavailable."

The Louisiana Offshore Oil Port, which imports 11% of all U.S. oil consumption, closed on August 27, and Shell reported a reduction in production of 420,000 barrels per day (67,000 m3/d). The port was undamaged by the storm and resumed operation within hours of getting power back.

Due to fears that the production of oil in the United States will be cut by up to one-third of normal capacity, the price of oil fluctuated greatly. West Texas Intermediate crude oil futures reached a record high of over $70 per barrel ($0.44/L). There were many reports to Louisiana authorities and elsewhere of price gouging, not only for gasoline, but also for other needed items such as bottled water. In some areas, gasoline was being sold for as much as $6 per gallon ($1.59 per liter). One BP station in Stockbridge, Georgia, south of Atlanta, was selling gas at $5.87 per gallon ($1.55 per liter) less than a day after Katrina hit. Just before the storm, average fuel prices were approximately $2.50 per US gallon ($0.66/L). International oil prices also rose. In the United Kingdom, pump prices for unleaded petrol (gas) hit £1 per litre ($7 per U.S. gallon) for the first time in a significant number of places (averaging about 95p), a rise of about 3% from pre-Katrina prices. Wholesale prices were up 5% by September 6.

Long lines developed at some gas stations throughout the U.S. as customers rushed to buy gasoline, anticipating price increases in the wake of the storm. Emphasizing the seriousness of the situation and in light of similar incidents in his own state, Governor Mike Easley of North Carolina has issued a statement asking all North Carolinians to conserve gas, limit fuel consumption and non-essential road trips, and for state employees to car pool. On the day of the Governor's announcement, many gas stations around the state ran out of gas and lines were formed at others.

By 12:00 p.m. CDT on August 31, eight Gulf of Mexico refineries remained shut down and one was operating at reduced capacity. Evaluation of five of the eight refineries was delayed due to limited access. Aside from the problems involved in restarting the refineries (which is a lengthy process) there were additional major issues with worker housing, since a large proportion of homes were destroyed by the hurricane.

The Environmental Protection Agency moved to reduce prices by temporarily lifting fuel standards in America until September 15. Some crude oil was also released from the Strategic Petroleum Reserve, as well, to combat prices as major economic consequences were predicted if prices remained high for a long period of time — leading consumer spending to drop and causing many foreign economies, especially in Asia, to suffer. President Bush also temporarily waived the Jones Act, allowing foreign oil companies to ship oil between ports of the United States.

By September 7, Gulf oil production had returned to 42% of normal. Of 10 refineries that were shut down by Katrina, four were expected to be back at full capacity within a week, however another four could be out of commission for months.