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The peak oil crisis: hurricanes and meltdowns

Earlier this week Hurricane Dean slammed into the Yucatan peninsula and crossed over into the Bay of Campeche where some 1.5 million of the 10 million barrels the U.S. imports every day are produced. While it is too early for a full damage assessment, at best a few days of production will be lost and possibly quite a bit more if any of the production platforms, pipeline systems and nitrogen injection facilities have been damaged.

This suggests that U.S. imports will be less than normal over the next few weeks. While some of these imports might be made up by increased shipments from other countries, the tight overall oil market suggests that this will be difficult.

Among the more interesting effects of Dean's landfall was a major drop in the price of oil in New York. The world's oil traders were so relieved Dean did not go up the Houston oil channel and figuring that the Yucatan peninsula would protect Mexico's offshore production from serious damage, they drove down the price. One sure fallout from the Dean-induced lower prices will be to stifle any incentive for OPEC to increase production at its September 11 meeting. This of course sets the stage for a much tighter supply/demand situation this winter.

A surge in crude imports resulted in U.S. crude and product stockpiles increasing a bit last week. U.S. importers may be rushing to get ahead of the hurricane season which will likely slow imports into the Gulf and may disrupt production beyond what hurricane Dean did to Mexican production. Our gasoline stocks, however, dropped by an unusually large 5.7 million barrels, thus, putting our gasoline inventory well below normal.

If we don't take a hurricane into the Gulf coast in the next two months, we should be o.k. If one should happen along however, almost any disruption in U.S. gasoline production is likely to result in shortages east of the Rockies. Unlike two years ago, it is unlikely that Europe can bail us out.

During the past week, the subprime-induced credit crunch raised increased concern in the peak oil community. As credit problems continue to spread around the world, there is speculation that the crunch may be growing beyond central banks' power to control the situation. Outcomes being discussed range anywhere from temporary market "corrections" to a major meltdown of the global financial system.

From the peak oil perspective, the concern is that a slowing of world economic activity will result in diminished demand for oil, lower oil prices, and subsequently reduced investment in additional oil production. As more oil becomes available at lower prices, investment in alternative energy would likely drop and the whole process of transitioning to a post-oil world would be set back — possibly by years.

Oil, however, is so deeply ingrained in the world's economic system that a business recession, unless it is a very severe one, is unlikely to cut demand as quickly as economic activity slows. Too much oil is now needed for life-sustaining functions such as food production, heating, and transportation. There is also so much economic momentum in economies such as China and India, that it is difficult to imagine outright reductions in oil consumption even during extreme economic hardships.

In such a situation where little new production is coming online, depletion of existing fields would soon result in rapid drops in world oil production so that shortages and higher oil prices soon would contribute to economic distress.

So there's the news for the week: our gasoline stocks are so short that a hurricane hit is likely to result in shortages; world supplies are unlikely to increase enough this year to avoid much higher prices in the next six months; and some think we are seeing the beginning of the mother of all economic meltdowns.

Not much should happen before Labor Day, however, so we can all enjoy the rest of the driving season.

What do you think? Leave a comment below.

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