Katrina and pipeline damage...?

Here's a Yahoo news piece that argues: (and thanks to the folks who sent this in)

WASHINGTON (Reuters) - Hurricane Katrina did more damage to underwater oil and natural gas pipelines in the Gulf of Mexico than previously thought, according to the U.S. agency that oversees offshore energy production.

Well it has taken 2 weeks for part of the truth to leak out. Watch for more developments over the next few weeks when we all realize its not a small problem but a huge one.

When the markets get wind of the real size of the problem you can bet prices will go ballistic.


And look at the Reuters article cited by mw here.
Also look at FireTemple's post here and HO's response.

This is looking worse and worse -- when will the markets respond?
Keep in mind is that much of the recent and current pricing for oil and natural gas may be due to speculation on the expected damage. If the actual damage is less than was expected, prices could actually fall (in reaction to the damage reports).  Never mind that there might be other news that pushes prices down more than the damage reports push them up.

I'm reminded of weeks before the dot-com bubble burst: Greenspan gave the markets a stern reprimand, warning that a large correction was on its way. The markets were glad that he had aired that laundry, confidence swelled, and prices climbed even more steeply for a couple of days.

The moral is that markets are weird. Attempting to predict their future behavior, and often trying to understand their past behaviour, are like peeing in coffee to make it taste better.

Love that graphic image :-)
I'm remembering the days after 9/11, watching the story develop on the news. Initially, the story was less scary--and less accurate--for example, I'm pretty sure I remember them saying that the passengers on the planes didn't know what was going to happen.

Each day they'd let out another piece of information, breaking it to us slowly. I got a very clear impression that it was being managed to minimize panic. (I was also impressed with how quickly they developed theme music for the news--that somber, semi-tonal stuff--I think they had that by the first or second evening.)

Now I wonder whether they are doing the same thing with Katrina (and maybe Rita) damage. Don't panic the people... let out the news bit by bit... give the people time to get somewhat distant and distracted (which doesn't take long these days) so people don't have their natural/immediate emotional reactions engaged.

Sorry if this sounds tinfoil. I've mentioned the 9/11 news thing to quite a few people in casual conversation, and they have all recognized what I was talking about.


Was there any damage done from Hurricane Dennis? If you recall, Dennis also went into the Gulf and with the new information about that these rigs were only designed withstand a Cat 3, the highest winds recorded for Dennis reached as high as 150 mph in the middle of the Gulf which would make it a strong Cat 4.

So was there damage to any of the rigs?

One of them that is still fresh in my mind is the Thunderhorse Platform.


"When the market gets wind of this you can bet prices will go ballistic." IMO they have been doing just that, only, for the moment, natural gas, gasoline, and heating oil have been moving much faster than crude oil on the NYMEX. November natural gas made a life of contract high yesterday; heating oil and unleaded gasoline just failed at retests of the highs yesterday. If the natural gas price chart isn't already ballistic I need stronger eyeglasses.

Not that I disagree with the actual meaning of the post I cite; my feeling is that pipeline damage has not yet been factored into energy pricing. But, and this is a big but, guessing what news is "priced in," and what is not, is one of the biggest challenges in trading or investing. Many times we get excited about news, and the price does the opposite of what we expect. Why? becuase the markets had already accounted for the news, and the smart money realized it was time to take profits on the good news, or begin bargain hunting after the bad news. And often this is the point at which financially unsophisticated people start yelling about "manipulation."

I'm leaning to "not fully priced in" as yet, but I must say lately one day blends into the next and I'm having a hard time mapping on the chronology of news and rumours against price action. That NG chart is a beaut, mind you its left a little spike atop a big run up. Still an up day but... I'm sure most expect a pull back and often that's all which is needed to start one.

Coming up: there may be some additional upward pressure on price exerted soon as a result of the caribbean disturbance. Should it ever develop into something, tracks are slowly moving northward.


Oh. Oh. Katrina knocked out the FTD site.
Prof. Goose, Don't you ever sleep? :-)
You are assuming he's only one person. You know what happens when you assume too much (or too little).
laugh  Oh I sleep now and again.  :)  Just some nights, you get "busybrain..."
The WSJ is reporting that it's taking a lot longer to recover from Rita than from Katrina or Ivan:


"A lot of dock facilities that boats would leave from are gone. Hangars are messed up. Helicopter availability is tight," Tony Lentini, a spokesman for the Houston-based exploration company Apache Corp., told the paper.

The storm also did significant damage to rigs, which are used to explore for new offshore sources of oil and gas. The two hurricanes either sank or seriously damaged 13 drilling rigs, the Journal reported, citing ODS-Petrodata, an offshore market-analysis firm. That shrank an already tight Gulf of Mexico fleet by 12 percent, and could hamper exploration for months to come.

...Restarting seven refineries hit hardest by Rita -- from Port Arthur, Texas, to Lake Charles, La. -- is also taking longer than originally thought, the paper reported. A bit more than 20 percent of U.S. refinery capacity is now out of service from damage from either Rita or Katrina.

Reliable electricity is turning out to be the biggest hurdle for restarting refineries in the hard-hit area around the Texas-Louisiana border. The Minerals Management Service's own office in Lake Charles could be shut for a month due to lack of electricity.

Even some refineries not hit head on by the storm are taking somewhat longer to fix than originally expected. BP said Thursday it could be several days before damage to insulation is repaired at the nation's No. 3 refinery, its 437,000-barrel-a-day Texas City facility. Texas City is near Galveston and Houston.

Perhaps the scariest thing:

It's also pushing the Bush administration to unveil a national energy-conservation campaign next week, aimed at giving consumers, businesses and federal agencies tips on saving energy during the winter heating season. Conservation has been at best a low priority for the administration in the past.

Now I know we're in trouble...

I think it means more that Bush is in trouble; it's no longer possible to deny those realities.
BP's texas refinery takes almost 1 month to restart, even with zero damage.

I work for BP on the business side, and we got an email about it.

*note, I have no insider info or anything like that at all. I make sure gas stations can take credit cards basicly.


BP's press releases regarding Rita, damage, and assessment.

There does seem to be a major disconnect between the news about storm damage and the market's behavior.  

This is nothing more than a wild-a**ed guess, but I think it all comes down to who's doing the trading on NYMEX.  My hunch is that on average the traders know a LOT more about markets in general, the mechanics of trading, and where various energy products come from and go to at the macro level than they do about deep infrastructure and technical issues.  As a result, it's very easy for them to make a wrong assumption (or be lied to, depending on your level of cynicism) based on an assurance that "things will be up and running in short order".

(I see this as being very similar to the syndrome in some large technical companies where it's taken as a "fact" that you don't need technical knowledge to be a good manager, just good generic management skills.  I worked for both technically adept and technically dumb-as-a-post managers in my time, and I think the notion that a good manager can manage things without understanding them is laughable.)

If the underlying situation is indeed worse than we thought (or was made generally known), then the market will react in time.  The problem is that while short-term volatility has been averted (a good thing), we've also had unnaturally low energy prices during that time, which gives us even less time to react to the inevitable price run up (a bad thing).

Look out your window, people.  This is what interesting times look like.

This was the point of my post a few days ago http://www.theoildrum.com/story/2005/9/25/22354/1972#7
and the excellent discussion concerning supply destruction and prices.  I think we are getting some historical data now on how bad the conventional markets are at actually factoring in changed conditions.

I agree we have avoided a panic situation.  Also agree that we squandered a lot of energy supply in the interim. We could have saved that energy for a cold winters day with a national acknowledgement and strategy for reducing demand.  

I am also concerned that a Bush policy will be too little too late and very business oriented.

I still believe the major driver for this situation - markets not yet reflecting the full extent of hurricane damage in crude/gasoline/NG prices - is the Bush Admin's aversion to politically damaging high gasoline prices.  They are managing things to keep gasoline prices down however they can.  The MMS initial statement (9/6) that undersea pipeline damage was not all that bad - when they'd had no time to assess that - is just one facet.

In the medium term, I suspect they are contributing to a situation where refinery change-over to distillate production is being delayed, building gasoline stocks when we should be building distillate stocks.

This will bite them later, when people realize that Bush constituents who drive SUVs have been spared even higher prices for their motor fuel at the expense of those who rely on oil heat, who are generally not so well off.  But they will have succeeded at least in postponing some of the political pain.  Now maybe they'll get another judge through before they lose all credibility.  That may be the last major element of the administration's agenda that gets through.

This is tangential, but I have to ask.

Lou, I have worked for very large, complex organizations. Above a certain level, it is simply impossible to have deep technical expertise in all areas you are responsible for. Since there are in fact large organizations that are well managed, I don't undestand your breezy dismissal of the notion that a good senior manager can manage areas she is not technically adept in.

That depends on what you mean by "manage". Consider the Auckland power supply. When it was a public utility it operated by rules of thumb that the managers could use even if they did not understand them. When it privatised they attempted to change their rule set so that it would be more economically managed. Basically they reduced investment in power transmission, and reduced maintenance. When one of their four power lines into Auckland went down to lack of maintenance accident, they attempted to put all the power through the other three lines. When you do that, the line's insulation heats up, it can't insulate well enough at the higher temperature, and it goes down. The second line went down in three days (IIRC), the third went in three hours, and the last line lasted about twenty minutes. No kidding.
It took weeks to get power going normally into Auckland. It is bizarre that they would even attempt this, but they did. That's what lack of technical skill does. As long as everything goes along smoothly using the old rules of thumb, you are all right. When things change the non tech managers have absolutely no idea what to do.
Consider Bush and his spastic, floundering response to New Orleans. He isn't deliberately trying to crash the US economy, he's just doing the best he can without understanding that is is not just another pork situation and that he has to fire and publically prosecute people who screw up. Not that that would do any good because then the political appointees would just freeze up and do nothing. I don't see a way out for Bush.
I appreciate your point, but all you a really saying is that bad technical supervisors (the "rule of thumb" guys) screwed up when new bosses tried to run things more economically, which is itself a laudible goal. The new bosses' mistake was not that they failed to understand the nuts and bolts of the existing transmission system, it was in not sacking the rule-of-thumb crowd and replacing them with line supervisors who could run a grid.

I won't get into Bush and NOLA, other than to point out that in a federal system primary responsibility rests with local and state government.

Actually, no, (IIRC) the old managers were the new managers. It was that the policies that they operated under were set up when the power system was established in the old days. The previous managers came up from the ranks of engineers and were gradually replaced by suits who didn't know what they were doing so they just continued on in the old way until they were informed that they were going to be privatised. After that they did the best they could.
This is a natural progression in most companies. First generation are techs, second are accountants, third are marketing, fourth are receivers (joke!)
I'm wrong. I went back and looked at it (not hard, with Google) and discovered that the management was new after it was privatised, and they promptly laid off half the work force, probably the ones that told them they were skimping on maintenance and capacity.
Traders have all kinds of backgrounds. Many started as clerks in trading houses and gained, as Lou said, an excellent background in trading and its mechanics. That said, the major houses do have energy analysts -- some of whom are also career financial people, some from the energy industry orgininally.

You can bet that the houses give their traders the best knowledge they have, because it would be very destructive financially to the house account to do anything less. Their energy analysts better be useful, because if they cause their firms to lose money, they get fired. Fast. Their is absolutely no percentage in havin an analyst tell the traders anything less than his very best analysis -- for the trader or the house. Manipulation in this sphere, just is not on.

As to us independent traders, our backgrounds are all over the lot.

Plus also folks have to remember there are all sorts of people out there trading with different motivations.

Some believe this is all overdone.. really.

There are corporate oil and gas interests selling to lock in profits for hedging programs.

There are airlines buying or selling depending on where they feel price is headed.

The one common denominator is profit and loss, and fear - fear of loss, but fear of "missing out" is very likely a stronger emotion. Some call it greed, I call it fear, just of another nature.

When the market has less than perfect information, it chops around. That's what Crude is doing.

Natural gas on the other hand is still in an up trend - perhaps a little extended, but it may yet surprise and head higher.

Crude is in a long term up trend but is in a trading range of late.

As far as I am concerned, markets are behaving much as expected; if the news indeed is worse than is known today, I do see higher prices.


Not to beat a dead horse but I agree that markets and traders are useful over long periods of time.  I'm interested in the shorter term.

What I am concerned with is the substitution of market pricing, trends and signals for old fashioned (and out of fashion) government regulation based on scientific forecasts.  IMHO not all societal decisions, especially planning, should be left up to the markets.  Too many business decisions are being made on market signals without context.  

As you and Lou rightly point out traders are interested in making a profit and not getting caught on the wrong side of a trend.  As long as there is money to made in swings for the commodity there will always be mixed signals.  And people willing to risk money to make profit no matter what the price.  The price is too high or the price is too low, for many it is both at once.  

An example.  The fixation on the current price of trees may completely ignore the fact that there is no forest left to harvest until the last tree is gone.  Then there is a collapse of that tree market.  Regulation outside the pricing of trees should maintain a viable forest and allow a trading market in trees to continue for a very long time.  Nothing wrong with a tree market as long as it is in context of a viable long term forest policy.  

I see over reliance on market signals to make policy, or justify policy.  In the absence of country wide regulation, business has no choice but to rely on market signals.  This is why GM focused on large SUV's while Toyota and Honda focused on Hybrids.  The market (in the U.S.) said that the SUV is the only kind of car U.S. drivers would be buying in the future.  The market was wrong, when used as a predictor more than a few months into the future.  This is way too short term for capital investment.

What are the signals that non energy businesses are getting today on energy supply and cost 2 years in the future.

Actually I think you are interested in the longer term, based on your concerns. As for whether or not the market is a good mechanism, that's largely irrelevant to me - its my livelyhood, not my religion.

There is country wide regulation of all sorts controlling energy markets, but many forms of energy are not strictly limited to the control of one country. Much as you'd like to regulate the price of crude, you can't, because in the absense of a market, international anarchy would result.

Instead of those with the biggest pockets buying crude, it would be those with the biggest military or most to gain who would control it by force. Wait a minute... that's those with the biggest pockets ;-)

Unfortunately... that's a scenario not too absurd to dismiss.

Your beef is actually with the makers of cars, not energy companies anyway. They made an inferior product for many years, and then, thanks to the Ford Explorer (I owned one of the originals myself), started a whole new wave. Bigger = more expensive = more profit margin, because they were getting killed by imports.

They will still get killed by imports, but not if they start making cars that people will be able to afford.

Your beef should also be with CONSUMERS who are stupid enough to buy into rampant consumerism themselves. We should not point fingers at government or industry or the energy providers without first pointing at ourselves.

This crisis did not arrive on our doorsteps merely because of two hurricanes... its been long in the making. If we focussed on education we'd need less regulation.

Iran, Nigeria and Venezuela will continue to be the most likely spots for price shock events for a while.

Here's today's Iran installment:

Iran says may hold back oil sales if sent to UN

DUBAI (Reuters) - Iran, the world's fourth biggest oil producer, may hold back on oil sales if its nuclear programme is referred to the U.N. Security Council, President Mahmoud Ahmadinejad said in an interview published on Saturday.

Iran has failed to convince the United States and the European Union its nuclear programme is peaceful, prompting the U.N. nuclear watchdog to recommend Tehran be reported to the Security Council for possible sanctions.

Diplomats expect a referral is likely in November.

"If Iran's case is sent to the Security Council, we will respond by many ways, for example by holding back on oil sales," Ahmadinejad told the United Arab Emirates' English-language daily, the Khaleej Times.

http://today.reuters.co.uk/news/newsArticle.aspx?type=worldNews&storyID=2005-10-01T113901Z_01_MO L133634_RTRUKOC_0_UK-IRAN-OIL-NUCLEAR.xml

The only reason there is for not making war on Iran is because they are pumping oil.  No oil, no reason to leave them alone.
On the other hand, if they stop pumping oil, it is not at all clear that making war on them is going to restore even part of the missing supply.
No, but destroying their nuclear capability would eliminate a lot of other grief down the road.  You want a nightmare scenario?  The Mad Mullahs with nukes is a good one.
Off Topic: Yahoo News Story - http://news.yahoo.com/s/ap/20050930/ap_on_bi_ge/o_hare_expansion

FAA Approves $15B O'Hare Expansion Plan

The Federal Aviation Administration announced Friday it has approved Chicago's $15 billion plan to expand O'Hare International Airport.

But the plan has drawn intense criticism from opponents -- in large part because the 440-acre expansion would require that the city purchase and raze more than 500 homes, displacing about 2,600 residents, as well as require the relocation of nearly 200 businesses and a cemetery dating back to the 1800s.

My comment:  They are clueless.

Yikes.  Calling them "clueless" is being kind, Rick.

I've been predicting for some time that 20 years from now we'll be driving in our electric cars (partially recharged via  house rooftop solar panels) to malls that were once airports, back when, you know, everyone flew and not just the wealthy.

Now this:  American temporarily cancelling some flights from O'Hare.


American Cancels Some Flights on Fuel Costs

FORT WORTH, Texas - American Airlines, the nation's largest passenger air carrier, announced Friday that it was canceling 15 round trips temporarily in markets it serves from its two largest hubs, Chicago O'Hare and Dallas-Fort Worth international airports.

The cutbacks will go into effect Wednesday and continue through Oct. 29, when American said it will evaluate the jet fuel market and decide whether to restore the flights.

"The skyrocketing price of jet fuel has forced American Airlines to take the regretful step," according to a statement issued by the Fort Worth-based airline, a unit of AMR Corp.

I've been concerned about natural gas prices, especially for this comming winter, for some time now. My fears seemed to double with the results of Katrina and Rita. Well, looks like I was justified. Today's paper reported that NG pricing in Minnesota is going to be 73% higher than this time last year. This is gaoin got cause a significant finacial drain a lot of folks, and not just the low income folks that might qualify for energy assistance. With any luck, it will be a mild winter. I haven't check the Farmers Almanac yet to see their predictions.


In addition to the price is the question of supply.  

I just purchased a corn fireplace insert.  To stop all of the comments, I live out in the country, surrounded by corn fields...owned by small farmers.  Think of it as a renewable resource that renews in 4 months and I'm helping out the local economy (friends and neighbors).

I would love to put in a corn fireplace insert and/or solar thermal heating. However I am currenlty renting. And while I do have a very agreeable landlord, I'm not sure he'd go for this. We will be taking advantage of our fireplace this winter as more than just "it's fun to have a fire".
Ooookay, I'll bite.  What is a corn fireplace insert?
It is a device, like a woodstove that fits inside of your fireplace.  http://www.amaizablaze.com/

The basic difference is that it burns corn kernels instead of wood.

I'll use 5 or 6 tons of corn at $94/ton for a total of $470/$564.  Last year I used about $900 of natural gas...this year that would have been $1500.

I can still use the natural gas furnace if I need to (really cold days).

Also, Corn, Wood Pellets, and various Grains burn cleaner than unprocessed wood.
Your concern is justified. Here in Colorado XCEL has announced two prices hikes, one in October with another coming in December. Together, the two hikes will double prices here.

The NY Times has this article (yesterday) and the bad news is pouring in. From the Times
That is about to change as colder weather sets in. A hot summer, which pushed up natural gas consumption by electricity companies and depleted winter stocks, is expected to give way to a cold winter...
I don't know how the meteorologists divine a cold winter but there it is.
google says story is 40 mins old..

Oil: A Bird's Eye View of Rita's Fury
A helicopter ride reveals partly flooded refineries, smashed ships, and blocked waterways. The industry's recovery will take a great deal of time