by Richard R. Loomis

It has become as familiar a sight on television as beer commercials and American Idol: the intrepid network reporter, clad in a whipping trenchcoat, hanging onto his hat with one hand and clutching a mic with the other as he graphically describes the wind or the rain descending on Florida, Louisiana or Mississippi. Tropical Storm Your-Name-Here is headed our way, and it could become a Category 2 or 3 or 4 hurricane. The streets are empty in town.

And over in the Gulf of Mexico, who knows what damage may befall our offshore rigs? That’s followed by predictions of rising oil prices and comments about windfall profits. Then the storm passes, and once again we wonder why oil companies don’t explore in the rest of the country.

Eye of the Storm

As I write this in September, the sky literally is falling. Hurricane Ike has passed through Galveston, Texas, and howling winds have descended on Houston, where my family lives. Our electricity was the first to go, but we did not have to evacuate.

As a hurricane season(ed) veteran, I rely on backup power and hope this storm will have less of an impact than the media would like us to believe. As a coastal Texan, I have grown accustomed to taking a wait-and-see approach to the hype.

And, having been though a few of these now, I know there is nothing to be said against keeping the residents of coastal cities and the oil industry workers safe from a storm’s damage. The orderly evacuation of New Orleans ahead of August’s Hurricane Gustav probably mitigated casualties and presented a better picture of government oversight than, say, the chaos of Hurricane Katrina did.

But at the same time, what is a disaster-sensitive public to do when every tropical storm is played to the hilt in the mass media? I have had numerous calls from collegues, family and friends reacting to the news coverage and hoping we are all right. This is the type of concern that should be out there; however, predicting the high price of oil and a return to the $150 mark is short-sighted hype.

Attack of the Balloon Tappers

Regular readers of World Energy Monthly Review may remember our feature, “Fear Factor,” from July 2006. Even before Katrina hit, we noted that whenever oil prices appeared to stabilize or even (heaven forbid) drop, sensational headlines from around the world would materialize like magic. Like hands tapping a balloon to keep it afloat, these news stories would spike oil prices higher and higher.

Consider, then, that it was rather a quiet summer in the usual global hot spots. Nigerian rebels largely left pipelines alone. Iranian radicals did not blow up any refineries. The talk is about extricating U.S. forces from Iraq. So perhaps it was up to “climate change” and the threat of a hurricane to stir things up in the market.

It seems that even the threat of a tropical storm is enough to get the presses rolling and the pundits chattering about this new threat on the horizon.

But try as the media might, the spike in price did not happen. At press time, Hurricane Gustav had left our shores, Hurricane Hanna had devolved into a less-damaging tropical storm, and Hurricane Ike was heading toward Houston. The fact that the oil price did not jump after Gustav is really pretty good news.

The news at press time was that Ike was roaring into the Gulf and headed toward my home, and the reporters were at full tilt speculating on the impending destruction. However, the traffic problems did not materialize, the neighborhoods that were predicted to be underwater were evacuated in a timely and orderly fashion, and all of our neighbors have checked in. And what is the price of oil? In fact, it is relatively stable – even briefly dipping below $100 for the first time since April.

Ike may be a hurricane, but so far the experience is a long way from the horrific toll that Katrina and Rita had on the Gulf coast. At the same time, the relative safety of the oil rigs drove prices downward from late August through early September. Katrina, of course, was the catalyst of the weather-related fuel price spike. When pump prices hit $3 during 2005, the public was outraged. Now that $4 has become the norm, people are beginning to realize that many factors, not just weather, are impacting the global marketplace.

Voices from the Fray “Gustav was one of those rare moments when political arguments are made by reality, not rhetoric. It was the time to simply point and say: ‘This is why we oppose more drilling.’ It was also the time to recall that during hurricanes Katrina and Rita, the official Minerals Management Service report found more than 100 accidents leading to a total of 743,400 gallons of oil spilled throughout the region. To put that in perspective, 100,000 gallons is classified as a ‘major spill.’ If one is feeling particularly bold, a category five hurricane is also an opportune time to mention that scientists see a link between heavier storms and warming ocean temperatures – warmed in part by the fossil fuels being extracted from those fallible platforms.” – Naomi Klein, the Nation, Sept. 3, 2008 “Gustav was no Katrina, but it seemed that along the coast, officials and ordinary folk had taken steps to fill the holes in emergency preparedness that Katrina revealed. The necessity of evacuation is better understood, and better arrangements are in place for managing it. Officials got the National Guard out. They didn’t mince words with the public. (‘Get your butts out,’ is how Mayor Ray Nagin put it.) And the public seemed more inclined to listen, and act.” – Newport News (Va.) Daily Press, Sept. 5, 2008

Location, Location, Location “It is tempting to look at the line-up of storms in the Atlantic (Hanna, Ike, Josephine) and, in the name of everything green, blame climate change for this state of affairs,” wrote Amanda Ripley of Time. “But there is another inconvenient truth out there: We are getting more vulnerable to weather mostly because of where we live, not just how we live.” In recent decades, “people around the world have moved en masse to big cities near water,” Ripley notes. “The population of Miami-Dade County in Florida was about 150,000 in the 1930s, a decade fraught with severe hurricanes. Since then, the population of Miami-Dade County has rocketed 1,600 percent to 2,400,000.” It amounts to an American penchant for “life in harm’s way,” as writer Michael Grunwald put it in another Time article.

Stormy Weather

The last three or four named storms did minimal damage but received more coverage than in years past. Today, a tropical storm is enough to generate headlines and invoke fears of a drilling and refining shut-in. It seems that it is now major news that a tropical storm has formed, and the potential impact of the storm is good for several days of headlines. This is a position that used to be reserved for really big hurricanes. Speculators now use every breeze, it seems, as an excuse to ponder possible effects on the oil price as well as potential storm damage, and Hurricane Ike is no exception.

But the facts don’t jibe with the hype. Even the most catastrophic storm in recent years, Katrina, did not destroy the oil infrastructure in the Gulf of Mexico. The industry is prepared to take hits of Category 2, 3, or even more. We should not be surprised when the financial community takes it for granted that the industry is ready for this event.

Just before one of the tropical storms came toward Houston I happened to be in the offices of one of the large service companies. The CEO and I were visiting about his company, and he showed me his newest toy, a high-tech satellite phone designed to keep him in contact with vital personnel should the corporate office be wiped out. His comment was somber: “If this building cannot withstand a tropical storm, how did it pass code?” A bit of humor, but it shows just how ready this industry is to react to the slightest danger.

Let’s take a quick look at the September timeline for Gustav and Ike:

Sept. 2: Gustav arrives. Hurricane Gustav forced the complete closure of 14 refineries along the U.S. Gulf Coast, representing some 2.716 million barrels per day (mb/d) of the region’s refining capacity, the U.S. Department of Energy (DOE) said in early September. The DOE also reported that downed refining capacity equals 36 percent of the total refining capacity in the path of Gustav. Another 10 refineries in the region reduced operating rates due to the storm.

Platts issued a press release detailing oil and gas operations in Gustav’s wake. “The U.S. Gulf oil and gas infrastructure appeared to be unharmed [Sept. 2] by Hurricane Gustav, although offshore operations remained paralyzed,” according to the release.

Sept. 3: Gustav retreats. Relief over Gustav’s hasty exit had triggered a lowering of oil prices. Light, sweet crude for October delivery traded at $109.71, the lowest price since early April – and a sharp contrast to the $147 peak in early July, which sent pump prices past $4 and infuriated consumers.

However, Tom Kloza, chief oil analyst at Oil Price Information Service, told USA Today that, the decline notwithstanding, oil prices were likely to range from $88 to $133 for the rest of the year.

Sept. 5: Status report. The Minerals Management Service (MMS) noted that offshore oil and gas operators in the Gulf of Mexico were restoring production after Hurricane Gustav, but about 90.5 percent of oil production and 79.8 percent of natural gas production remained on pause immediately following the storm.

• Estimated oil production from the Gulf is 1.3 million barrels per day. Estimated natural gas production from the Gulf is 7.4 billion cubic feet of gas per day.
• Personnel evacuated 334 production platforms, or 46.6 percent of the 717 manned platforms in the Gulf.
• Personnel from 34 rigs also were evacuated, or 28.1 percent of the 121 rigs operating in the Gulf.

“As the Gulf tries to recover, it is apparent that electrical problems will be key,” reported Platts on Sept. 5. “Regional utility Entergy said five of 12 major refineries within its Louisiana service territory are without power as a result of the damage Hurricane Gustav caused to the power grid. Three other major refineries have power, but are in shutdown mode for other reasons, and four others have grid power and are operating.”

According to the Associated Press, “Gustav’s punch turned out to be less severe than originally feared – especially when compared with hurricanes Katrina and Rita three years ago – but it still shuttered about 15 percent of the nation’s refining capacity in the region and brought nearly 100 percent of the Gulf’s oil and natural gas production to a halt.” This storm, however, “was preceded by a larger disturbance – an economic storm that was already driving down demand for gasoline and, as such, the hurricane did little to move prices at the pump.”

Sept. 9: Ike’s impact begins. Hurricane Ike, after scouring the Bahamas and Haiti, made landfall on Cuba as a Category 3 storm but then lost speed and became a Category 2. It was headed toward the Gulf of Mexico by Sept. 9 and was expected to make landfall in Texas later in that week.

“The main driver today and through the rest of this week will be Hurricane Ike. The market is going to zig and zag in response to each development,” Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates, told the Associated Press.

The dollar was also affecting energy trading, rebounding against other major currencies and encouraging investors who bought commodities to hedge against a weaker U.S. currency to sell them.

“When the dollar moves north or south, it has a dramatic effect on commodities across the board,” said James Cordier, president of Tampa, Florida-based trading firms Liberty Trading Group and OptionSellers.com.

Sept. 12: Ike hammers Galveston. The MMS revised its status report to include information about Hurricane Ike. According to its Sept. 12 report:

Offshore oil and gas operators in the Gulf of Mexico have evacuated platforms and rigs and have shut-in oil and natural gas production in preparation for Hurricane Ike; most of this preparation had been already completed in advance of Hurricane Gustav. The Minerals Management Service is monitoring activities for both hurricanes through its Continuity of Operations Plan team (COOP) team. Once the threat of the hurricane has passed, MMS will begin overflights to survey damage and confirm preliminary reports from oil and gas operators. The MMS COOP team will be activated until operations return to normal.

Based on data from offshore operator reports submitted as of 11:30 a.m. CDT today, personnel have been evacuated from a total of 596 production platforms, equivalent to 83.1 percent of the 717 manned platforms in the Gulf of Mexico. Production platforms are the structures located offshore from which oil and natural gas are produced. These structures remain in the same location throughout a project’s duration unlike drilling rigs which typically move from location to location.

Personnel from 101 rigs have also been evacuated; this is equivalent to 83.5 percent of the 121 rigs currently operating in the Gulf. Rigs can include several types of self-contained offshore drilling facilities including jackups, submersibles and semisubmersibles.

From the operators’ reports, it is estimated that approximately 97.5 percent of the oil production in the Gulf has been shut-in. Estimated current oil production from the Gulf of Mexico is 1.3 million barrels of oil per day. It is also estimated that approximately 94.4 percent of the natural gas production in the Gulf has been shut-in. Estimated current natural gas production from the Gulf of Mexico is 7.4 billion cubic feet of gas per day.

Sept. 13: Ike moves on. As Ike exited Galveston and headed toward Houston, the oil story was almost a secondary issue. The rigs were evacuated, the platforms had performed their shut-in procedures and the Gulf was effectively shut down until after the storm.

And still the hype continued. Television anchors were reporting that the pump price had risen five cents. President George W. Bush issued a statement warning against price gouging; the public was cautioned against hoarding gas and oil.

As Ike moved through Texas and the Gulf, the industry assessed the damage, moved back in and got everything back on line. Here in the Gulf of Mexico, we are used to this activity, and we have the very best working to get it all back to normal.

Ready for Hurricane Mahmoud?

So if Gustav or Hanna or Ike cannot intimidate the market, who can? Maybe hurricanes Mahmoud or Hugo or Vladimir. We currently import about 16 percent of our oil from the Middle East. That puts a lot of power in the palm of Iranian President Mahmoud Ahmadinejad, and that palm can quickly curl into a fist raised against the United States. With our current dependence on fossil fuels, we cannot afford to lose 16 percent.

So perhaps the speculators are waiting for Iran to make a real move, not just threaten some action.

Venezuelan President Hugo Chávez is currently sending us about 2 million barrels per day. Were he to decide to cut us off, that would remove another 6 percent of our imports – and that is not replaceable. To add some fuel to the fire, he expelled the U.S. ambassador and is once again threatening our oil supply. However, since we are his biggest customer, perhaps that threat is a hollow one.

Similarly, Russia’s Vladimir Putin knows that his country ranks high as a producer and exporter. Should he decide to flex his muscle, that would remove another 6 percent from our shores.

We should expect to see more news from these other “hurricanes,” including the effect they will have on future supplies. If the U.S. government wants to get serious about this issue, our country will have to develop our own resources with our best-of-class operations. We need to be able to bring on supply that a single hurricane cannot shut down. We also need to mitigate the influence that other countries have on our resources.

It is an election year; perhaps that will be the biggest hurricane of all. Will Barack Obama effectively shut down the expansion of our domestic reserves, or will John McCain ride in with Sarah Palin and save the day? u

Susan Salter contributed to this article.