Wednesday :: Aug 31, 2005

What Will Katrina Do To The Economy?

by Steve

OK, enough of the “blame Bush for everything” from me today; I’ve done my ration, as I’ll be the first to admit. I am not only worried about the catastrophic loss of life on the Gulf Coast, but I am frankly scared about what really just happened to our oil production and refining capacity in this country. AFP reported this afternoon that at least 20 oil rigs and platforms are now missing in the Gulf of Mexico, and have presumably been destroyed and fallen to the bottom of the sea. Since the construction of each one is a three-year, billion-dollar investment, even someone who hates oil companies as much as I do knows that those profits that Big Oil has been enjoying since BushCo are about to be eaten up, offset by whatever the insurance policies and inevitable Bush-Cheney industry assistance package provides in the coming weeks.

There are, of course, two issues here: oil supplies and oil refining capacity. On the supply side, any major loss of rigs in the Gulf will mean that we will need alternate sources immediately until a crash program can rebuild the Gulf’s rigs. ANWR is not an option, as those sources are years off and it is cheaper to rebuild and extract oil from the gulf than it is from new fields in Alaska. Our friends the Saudis might be able to pump more in the interim, but maybe not. And that leaves Canada, Mexico, and yes, Venezuela as sources. Oil prices fell today on the news that Bush was opening up the Strategic Petroleum Reserve to loan oil to refiners, who cannot resume operations until they have electricity and working pipelines. Yet this drop in oil prices will be short-term as it becomes clear exactly how much supply we may have lost in the Gulf. At some point in the next week, regardless of whether he wants to or not, Bush may have to eat crow and talk with Hugo Chavez.

As for refining capacity, again electricity is needed, as are operational pipelines, and we won’t know about either for several more days. What we do know however is that the market is already giving us bad news about gasoline futures, which can go up separate of oil prices to reflect the refining challenges over the coming months. And yes, there are reports on CNN that East Coast gas stations have shoved their prices into the $4-6/gallon range this afternoon, even though Bush has opened up the SPR. It is not a wild guess that Bush will find that he has to draw down a significant amount of the SPR in the coming months.

Economically, this tragedy comes at a time when the second quarter GDP came in lower than expected today, and the Chicago Purchasing Manager’s Index tanked in August, reflecting a larger-than-anticipated drop-off in Midwest manufacturing activity.

Folks, call me overly pessimistic, but is the economy about to tank? Your thoughts are welcome.

Steve :: 4:55 PM :: Comments (38) :: TrackBack (1) :: Digg It!