TCS Daily

The Post-Katrina Jump at the Pump -- Unavoidable?

By Ben Lieberman - September 18, 2005 12:00 AM

Under any set of circumstances, Hurricane Katrina would have had a noticeable impact at the pump. However, by hitting America's single largest oil and refining region at a time of already-tight supplies and the high prices, the effects have been amplified. Of course, weather-induced damage to energy infrastructure is unavoidable, but Katrina's impact on oil and refined products did not have to be so severe, and there are lessons to be learned for the energy debate to come.

Putting aside for a moment the far more important human toll, from an energy standpoint Katrina hit in the worst possible place. With approximately 25 percent of the nation's oil production and 16 percent of refining capacity in the Gulf region, the hurricane's impact will be felt nationally, at least for a month or two, and quite possibly longer. But both these percentages could have and should have been lower.

As regards oil, the Western Gulf of Mexico stands out not as America's only offshore area with oil, but the only offshore area that doesn't face severe federal limits on drilling. There is oil and natural gas in the Pacific, Atlantic, and eastern Gulf (which was not as badly impacted by this particular hurricane), but these areas are subject to federal moratoria restricting drilling. Alaska also has significant oil reserves, both on and offshore, but portions of them, including the estimated 10 billion barrels located on a small part of the Arctic National Wildlife Refuge (ANWR), are currently subject to restrictions as well.

If America was to make more sensible use of this oil, there would be greater production overall, a lower price (how much lower is subject to debate), and less vulnerability should any one region suffer a natural disaster. Instead of 25% of the nation's domestic oil production, Katrina could have jeopardized only 20 or 15 or less, and the effect would not have been so bad.

A similar story applies to refining capacity. Due in part to costly federal regulations, along with non-regulatory factors, refinery capacity in the US is very tight. No new refinery has been built since 1976, though investors in a proposed new facility in the Southwest are currently navigating through the years-long approval process. Capacity expansions at existing refineries have struggled to keep pace with increasing demand, and face a large and still-growing list of regulatory requirements. Some in industry say that the billions spent on regulatory compliance have diverted resources that would have otherwise been spent on additional expansions. A wave of federal lawsuits launched at the end of the Clinton administration alleging that many refinery expansions were illegal has not helped matters either.

Even under ideal conditions, the nation's refineries are barely adequate to meet demand. Producing enough motor fuels is particularly precarious during the summer, when demand is at its highest and several challenging summer-grade fuel requirements are in effect. In fact, in the weeks before Katrina hit, some relatively minor instances of unexpected downtime at a few US refiners were more than enough to cause noticeable bump ups in the price of both oil and finished products.

Thus, on top of an already precarious situation, numerous Louisiana refineries have now been damaged or lack electricity, and others are without immediate access to crude or are unable to ship finished product to market. This is likely to result in all-time record prices for gasoline and diesel fuel in the weeks ahead. Had there been more refinery capacity across the nation, Katrina's effect on fuel supplies would have likely been smaller, shorter in duration, and less widespread.

Usually upon passing energy legislation, as it did last month, Washington ignores energy issues for years thereafter -- and some consider this a good thing. This time, however, will be very different, as energy and especially gasoline prices will continue to be a high priority item when Congress returns after Labor Day. The debate will pick up where the Energy Policy Act of 2005 left off.

Unfortunately, this energy law contains nothing that will help in the short term, and only a little that might prove of benefit over the long term. But it does have a few measures that may serve as useful first steps.

In particular, though the law does not change any existing offshore drilling restrictions, it did authorize the first-ever inventory of offshore energy resources using state-of-the-art exploration techniques. Industry sources believe (and anti-drilling activists who opposed the inventory probably fear) that we may discover considerably more oil and natural gas off our coasts than is currently believed to exist. This information could and should lead to a serious debate over whether the restrictions should be lifted.

One good piece of news is that the ANWR drilling is likely to be approved, as part of the budget process rather than in the energy law.

The new energy law also contains limited provisions encouraging refinery expansions and streamlining the gasoline regulations that make it harder to produce the various fuel formulations required by law, but these measures could be expanded. On the latter point, the EPA recently announced that it is temporarily waiving a few problematic gasoline and diesel regulations. This should make it easier to produce and supply fuel, especially in the hardest hit areas. If this works, Congress should consider permanent ways to simplify the current maze of gasoline and diesel specifications.

Hurricane Katrina struck us at the worst place and time and revealed the vulnerability of the nation's energy infrastructure. It should underscore the need to strengthen the resiliency of a system that is barely adequate even under the best of circumstances.

The author is an analyst with the Heritage Foundation.

For more coverage of Hurricane Katrina and its aftermath, and to learn how you can help the victims of this disaster, please visit our special section Tragedy on the Gulf Coast.


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