Stand by for a rough ride

As we watch Hurricane Katrina come ashore and pray for the safety of the people who were not able to evacuate, there is little doubt that oil and natural gas production in the Gulf of Mexico is going to be seriously affected by this massive storm.

Off shore wells and the pipelines that connect them to distribution centers may sustain production slowing damage that will take months to repair. Refineries – and the area is thick with them – may also experience damaging impacts which will slow gasoline production. Piers, off shore unloading facilities and ships service systems that enable southeastern Louisiana to handle about 25% of all of the oil that is imported into the United States will be battered and may require significant, time consuming repairs.

Several nuclear power plants also operate close to the coast of southern Louisiana. My prediction for them, however, is that they will be back to full operation in a matter of days, based on recent experiences with the effects of storms on their more robust structures.

Traders have already begun factoring the possible damage into the markets for oil and gas. Even without the US markets being open, NYMEX crude oil prices have jumped almost 5% to nearly $70 per barrel and Henry Hub natural gas has gone up by almost 20% during the weekend to $11.70 per million BTU.

Those energy price increases are going to be felt deep in consumer’s pockets and will slow their purchases of many other items like travel, restaurant meals, entertainment and back to school fashions.

It has taken decades to build up southern Louisiana’s concentrated infrastructure for supplying petroleum products to the lucrative US energy markets. Sadly, though companies operating in this area are some of the world’s largest and richest based on the natural resources that they extract from places like the Gulf of Mexico, the area itself has hundreds of thousands of deperately poor people that could not even afford to evacuate from the path of the storm.

This single weather event aimed at a key location will make a huge impact that may damage the economy for many months. As discussed yesterday, there are already supply issues with coal.

Even with all of this tightness in the US energy markets, there are still highly placed people in the nuclear energy establishment who claim that a major reason that we stopped building nuclear power plants is that we were vastly overbuilding, creating a glut in supply. Here is a quote from C. Paul Robinson, former director of the Sandia National Laboratory in a May 2005 article in Physics Today.

“Nuclear power was grossly overbuilt because of predictions that energy growth was going to double every seven or eight years. When that didn’t happen, it became uneconomical, especially with the uncertain licensing procedures, to invest in nuclear power.”

I personally do not understand that sentiment. There was plenty of energy demand to support the nuclear plants – all we had to do was shut down the dirty coal plants and the natural gas plants that depended on a fuel with the potential for huge price volatility.