Saturday, September 13, 2008

Hurricanes and Fuel Shortages

Hurricane Ike just crossed Houston, the heart of the U.S. oil industry, probably flooding large areas in and around the city. Refineries closed to prepare for the storm, and while no one knows the extent of damage at this point, it is safe to predict that not all of them will reopen next week. Other oil facilities were already closed by Hurricane Gustav last week and may have suffered further damage from the current hurricane.

So many refineries are closed now that the U.S. Department of Energy is predicting spot shortages of gasoline across much of the country, from Virginia to New Mexico. Gasoline prices are likely to increase nationwide, though probably not, in most areas, to the levels we saw in June.

Fuel supplies are especially critical in the disaster recovery areas in Louisiana, Texas, and potentially Arkansas (where Hurricane Ike is headed next). In a disaster, everything from evacuations to cleanup depend on fuel, and officials will be trying to make sure there is enough fuel to power the workers who work to reopen roads, restore electric power, put out fires, and so on.

The damage from Hurricane Ike is not likely to boost crude oil prices, at least not right away. With temporarily diminished refinery capacity, the United States will be processing less crude oil in the coming weeks, and this slowdown may pull world oil prices lower.