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Hurricane Katrina’s Effect on the Oil Industry

August 31, 2005 at 12:00 AM EDT
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JEFFREY BROWN: “Our citizens must understand the storm has disrupted the capacity to make gasoline and distribute gasoline” — that from President Bush a short time ago, assessing the damage from Hurricane Katrina.

Today the president announced a decision to release oil from the nation’s Strategic Petroleum Reserve to keep refineries supplied. The reserve consists of some 700 million barrels of crude oil, stockpiled underground in Texas and Louisiana.

Joining me to discuss the situation is Red Cavaney, president of the American Petroleum Institute, an industry trade group. And Welcome to you.

RED CAVANEY: Thank you, Jeffrey.

JEFFREY BROWN: Why don’t we start by describing the range of facilities in the area that have been affected.

RED CAVANEY: They’re quite significant. Maybe to help you understand, 25 percent of the total domestic production of crude oil comes out of that Gulf region and about a little more than 20 percent of the natural gas. So it’s very, very significant.

Out on the Gulf itself there are about 6500 production facilities, and on the ground there are a large number of refineries, pipeline distribution systems and everything. It’s the most complex infrastructure that we have. And so when we talk about damage in an area of that scale, it’s going to affect not just that region but of course the areas from which they distribute their product, which is basically from the Midwest everything East.

JEFFREY BROWN: Is it possible to know how many of these facilities have been damaged yet?

RED CAVANEY: Well, right now when you look at the off-shore rigs, there are basically rigs that are close in shore that try and bring the oil and the gas out. And about 23 of those — principally older ones — were destroyed. When you look at the more sophisticated drilling rigs that are out there, four in the shallower water and four in the deep water — the deep water is important because that’s where the really big volumes are and the big investment. And so there are eight of those that have been damaged. And we don’t have a full assessment on how quickly they can brought on stream.

Of our refineries, however, in the area we know that there are nine that are out of commission at present for various reasons. And some of them have not even been able to be visited yet so it’s very hard to say exactly what kind of timetable those refineries can be brought back on stream.

JEFFREY BROWN: We know about the flooding damage, the problem, of course; there’s also the power problem.

RED CAVANEY: Yeah. And the problem is you can’t deal with both of these at the same time. You have to go in sequence because if you have refineries that are flooded, you’ve ve got to get all the water out before you’re going to put electricity in there. And after you put the electricity in, what you need to do is you actually need to try and start up and run tests on your refinery to see whether or not it can be run safely.

And only then can you bring it up and start to create some actual production. So we have to rely very much on the local community and the first responders to help us get the water out and then of course the utility industry which has been just terrific in terms of getting people from all over the country down there to help.

JEFFREY BROWN: Now, the president’s announcement today about releasing some of the oil from the petroleum reserve, what does that mean exactly? And how might that help?

RED CAVANEY: That’s a big asset because one of the things that also has been affected by this are the pipelines, and most of the crude oil and the gasoline, the diesel that travels around our country moves in pipelines.

But with no electricity you can’t have any pipelines running. So we did have just outside this critical area where we have the nine refineries that are basically out of operation for the moment, we have some refineries that exist, but their concern was how am I going to get crude oil there? And the normal channels weren’t able to do that.

So by accessing the Strategic Petroleum Reserve, those people are going to be able to know that they’re going to have crude oil product convert to gasoline and other things and so they’ll keep going and they’ll run very, very efficient.

Without the Strategic Petroleum Reserve release, they would have been concerned that they would run out of the raw material, crude oil, and therefore would have to shut down and we’d be even in a bigger problem so the Strategic Petroleum Reserve is very important.

JEFFREY BROWN: How big a difference does it make and how quickly does it get into these refineries?

RED CAVANEY: They can literally because they’re located in that particular area within a matter of a day to a day-and-a-half, from when they decide to make that first release it actually becomes of use but it’s also a psychological thing.

Knowing that it’s going to be coming in very short order allows you then to take more confidence that you can run your existing inventory full, rather than sort of backing off a little bit. It also helps those refineries that are down that may have said we can get our refinery up but we can’t do much if we can’t get crude oil.

Now they know with the Strategic Petroleum Oil Reserve there they have a back-up plan and they can have some good confidence that they can get the machinery running and the refinery up and going and the crude oil will be there.

JEFFREY BROWN: I see, but to be clear, for the moment, this is just to help refineries up and running. This obviously has no impact on the ones, the eight or nine that are down.

RED CAVANEY: No, not at all.

JEFFREY BROWN: Okay. Now the president instructed the EPA to relax some Clean Air Act provisions about the production of oil.

RED CAVENY: Yes.

JEFFREY BROWN: What does that do?

RED CAVANEY: Well, it helps you because right now even before we had the hurricane, we had a circumstance where we were in the prime driving season and the fact that prices were where they were was the law of supply and demand. There was as much demand as there was supply. And so therefore everybody was bidding up the price of the product.

JEFFREY BROWN: Excuse me. But in fact most of our discussions about this in recent weeks and months has been about the demand problem.

RED CAVANEY: Exactly. Demand driven. And now we have a situation where supply is driving this particular equation so the circumstance that people need to be concerned about was if special blends — the government sort of tells us what kinds of blends can go in what part of the country. That’s part of the rules of how to distribute them.

But if we can’t make certain blends that means we can’t deliver product to an area that requires another blend without a waiver. So by giving a waiver, it basically says we can get gasoline to wherever it’s needed and in the near term between now and Sept. 15, we don’t have to be concerned about the effects of these various regulations so it’s very helpful.

It makes us more flexible, allows us to move that around to where it’s needed and I think ultimately will allow us to bring in imports we might not ear otherwise be able to do.

JEFFREY BROWN: In the immediate term the impact on most citizens will be at the gas pump?

RED CAVANEY: Yes. They will see more opportunity for supply with this kind of flexibility than we would have otherwise had.

JEFFREY BROWN: And why does it hit so quickly? People wonder how that works — why is it overnight that prices rise so high?

RED CAVANEY: Well, what happens is there are about 160,000 retail outlets where the consumer actually buys their gasoline and diesel. About a little less than 10 percent are owned and operated by the industry itself, the refiners and the people that produce it.

The rest are small businessmen and women, small companies that they own those things and it’s very competitive marketplace because I don’t think there’s any other industry that actually posts its price for everybody to see every time they go by. And so what you see is the dynamic move of people trying to decide that I want to steal some customers away from my competitors. I’m going to lower my price by 2 cents or somebody else saying, look, I think I can make more money by holding my price with fewer customers. And so those are the kinds of decisions that ultimately drive the market.

JEFFREY BROWN: Right now people are seeing it go up though.

RED CAVANEY: People are seeing it because the problem with a commodity is if that’s the product you’re giving to consumers, you don’t want to be caught without it, so you’ll pay almost anything to get that last truckload to be able to take care of your customers.

JEFFREY BROWN: Okay. Red Cavaney, thank you very much.

RED CAVANEY: Thank you.