Here's some interesting excerpts from an analysis report by Stephen Gallo
>>>
Crude oil prices for October delivery are actually at lower levels than they were pre-
Katrina, indicating that the availability of oil is not an immediate problem. The
detriment is that even if oil production is completely restored, which it very well may
be, there is nowhere for it to go. Moreover, the Saudi spare capacity that will be made
available to replace the Gulf light sweet blend is much harder and more expensive to
refine. Oil refiners are just catching on to the fact that there is no other place for
petrol product prices to go but up. Petrol consumers should as well.
Simple Supply and Demand
The rise in petrol prices after Hurricane Katrina swept through the Gulf of Mexico has
highlighted the fact that the US refinery industry is unable to handle short-term supply
disruptions. This is likely to keep oil prices high for several years.
One thing that the last decade’s commodities bear market did not encourage was
investment in exploration and productive capacity. That is why today, U.S. and
global refinery capacity offer very little slack. U.S. capacity is already at 95% of
total, and spare capacity will dwindle because of Katrina. This, combined with high
demand from super commodity consumers like China and India, as well as the US,
has been enough to keep prices elevated. Chinese demand for crude oil alone is
growing rapidly and will have averaged an increase of 10% per year by the end of
2006 – the highest of any region in the world.
The U.S. has not built a new refinery since the 1970s. Moreover, the successful
lobbying of environmental groups, as well as a ‘growing-not-in-my-backyard’
mentality has made building any new infrastructure impossible. Between now and
this time 4 years ago, US refiners were forced to put $20bn into meeting ever more
stringent sulphur environmental targets, thus leaving little for capacity expansion.
In Europe the same trend is taking shape, not just with petrol, but diesel as well. The
European Automobile Manufacturers Association suggests that half of all new cars
sold in the region this year will run on diesel, up from 14% in 1990. And it all goes
back to underinvestment. The oil majors have simply not been willing to put their
money into refinery improvements – perhaps they thought that they could make more
money just by drilling holes in the ground.
Still Teetering
While the economic slowdown from Katrina in the U.S. is likely to be only modest,
this event should be a further signal to investors and people in general about where
the global economy stands. Both groups have been warned in the past about the
major risks that were likely to materialise if certain events occurred. High commodity
prices are an indicator of a robust global economy, but they can also wreck global
growth if supply cannot keep pace with demand.
Motorists in the U.S. are now paying more in inflation-adjusted dollars for their petrol
than at any point since 1981 at the height of the Iran-Iraq war. In the UK, the major
oil companies are planning to invest hundreds of millions in upgrading petrol pump
metres so that they can display prices in excess of £1 per litre. These facts should be
a warning that energy prices are going to remain high for years to come. Hurricane
Katrina may then be nothing less than the first blip on the radar screen in the making
of global energy crisis.
