Yergin: The Katrina Crisis, a hurricane produces an integrated energy disaster

I finally found an open link to Yergin's WSJ piece.  His change of tone is definitely noteworthy.
Yergin has always known he was going to have to pivot.  This disaster provides the perfect opportunity.
Thanks for the link, PG. OK, here goes my first attempt to earn a Daniel Yergin Secret Decoder Ring.

Re: "an integrated energy disaster" and "The full extent of the Gulf of Mexico energy infrastructure is hard to grasp" -- he means that every loss has impacted every other loss and the immediate situation is fubar.

Re: "Our platforms and facilities are designed for a 100-year storm. But this storm was something else." -- I am gratified that this obsevation, which I made on Sunday before the storm, is confirmed here. Climate change, anyone?
...the SPR is proving its role--not as a tool of market management, but to offset a major disruption, protect gross domestic product, and maintain the viability of our economy...
Well, it looks like a market management tool from where I'm sitting. In fact, I believe it is the only thing keeping oil prices from going well over $70/barrel.
A package of responses, such as properly inflated tires, adherence to speed limits, consolidation of trips, and tune-ups, could cut gasoline consumption by 10% to 20%. This needs to be reiterated again and again, for modest restraint on demand is the quickest way to take the pressure off the market. The flexibility of markets and the resilience of the energy sector are the most effective antidotes to high prices and disruption. We can see markets working, also, in the substantial build-up of supply from around the world that will occur over the next few years.
OK, we're zeroing in on the heart of matter here. We need to conserve now and wait a couple of years for that supply windfall that's coming our way. Markets are not flexible or resilient now but they will be soon.
The rocks under the gulf are highly prospective, and companies will carry on applying capital and ingenuity to developing the resources--now planning not for the 100-year storm, but for a 200-year one. Oil production from the gulf could rise from two million barrels today to 2.4 million by 2010. That would mean the gulf's share of total U.S. oil production rising from today's 35% to 45%, although the recovery from Hurricane Katrina could end up pushing that level back a year or two.
In other words, I (Daniel Yergin) have learned nothing from Katrina. We will proceed with deep drilling in the Eastern GOMEX areas off Florida. There will not be anymore really big, intense hurricanes that we can't handle. We can engineer deep drilling infrastructure (platforms, rigs, pipelines) to withstand Category 5 hurricanes. The GOMEX future's so bright, I've got to wear shades!
...think more expansively about energy security...

But a host of developments--from terrorism to the California power crisis to the East Coast blackout to Katrina--have emphasized a return to what might be called the World War II model of energy security, assuring the security and integrity of the whole supply chain and infrastructure, from production to the consumer.
Despite the great windfall in excess capacity coming later, geopolitical necessity requires us to control the supply from the cradle to the grave, so to speak. Does anyone else find these two positions completely in opposition to each other?

By the way, here is an interesting related story Offshore Rig Rents Hit Record $400,000 a Day as Oil, Gas Rally (Bloomberg).
FABULOUS commentary, Dave!
I like the term "integrated energy crisis" in the opening paragraph.  But despite this insight, Yergin goes on to suggest that with the combination of SPR and "market forces" the crisis will be short and relatively mild.  He does not elaborate on the impact on natural gas prices this winter.  

Regarding "market forces," the assumption is that with high U.S. jet fuel and gasoline prices, the European and Latin American refiners will sell their fuels in the U.S. instead of at home where margins are less.  (Presumably the differentiating fuel specs will be waived during this period.)  Perhaps that would be the case in the ideal capitalist world.  But no democratically elected leader (as in most Latin America today) will risk raising fuel prices at home for a good financial quarter at their state oil company.  We may see some more gasoline from Europe (where the gasoline demand is falling in favor of diesel), but certainly no middle distillates or fuel oil.

So however you look at it, this is going to be a rough winter.

Without diving into the details of Yergin's comments (because I haven't read them yet), let me add one observation: "Crisis" is in the eye of the beholder.

Widespread gasoline shortages that last more than a day or two would create a crisis.  But what about gasoline in the $4 range (just slightly higher than the US price as I type this), but with only a very few, localized outages?  If you're a lower-income person, then the higher gasoline price could indeed be a very sizable and immediate burden, but for the economy overall, I don't think it qualifies as a crisis.

What if gasoline hit $6/gallon, and stayed there until late 2006?  I would probably consider that a crisis, even without shortages.

My point is that it's ferociously difficult to decide what is and isn't an "energy crisis", and for each of us it's a function of several factors (availability, longevity of the higher price, anxiety produced by uncertainty about future prices, etc.).  

My sense is that the prices we are seeing now (>$3) are ample to produce a good old-fashioned energy shock.  Even without the drag on consumer spending (which is substantial), firms from many sectors will be reeling at these prices--especially given how quickly we have gotten here, leaving little time for adjustment.  

That, combined with the heating fuel/natural gas crisis we are sleepwalking into, qualifies as a crisis in my book.  

A bit optimistic about the long term, but a good article from the Post:

"Storm's Economic Shock, Job Losses Likely to Rival Worst
Hurricane Katrina, by forcing an exodus of workers and families from New Orleans and surrounding areas, appears likely to rank alongside Sept. 11, 2001, and the Arab oil embargo of 1973 as one of the nation's most serious and sudden economic shocks -- particularly in terms of job losses -- in recent memory."

It's a recession when your neighbor can't afford to buy gas or heat his home; it's a depression when you can't afford to buy gas or heat your home.
Why does Yergin lie about what is and what will be going on in the GOM?  For example, he says that current production in the GOM is 2 million barrels per day, and that will expand to 2.4 million barrels by 2010.  That's complete crap.  The 2004 average production in the GOM was 1.46 million barrels per day, and for February, April, and May 2005 (the 3 months I could extract from mms), well removed from Ivan, the production was 1.455, 1.397, and 1.252 million barrels per day respectively.  The bottom line is that the 200,000 barrels per day he claimed to be down for "several months" after Ivan NEVER CAME BACK, either due to destruction, depletion, or whatever.  Katerina will similarly "reset" the production level to a much lower level, probably in the 1.1-1.2 million barrels per day range.  Even with the big projects coming on-line, when figuring in depletion I would be surprised if we see GOM production ever make it much above 1.5 million barrels per day again.

Yergin has a terminal case of the "Jimminy Cricket" syndrome ("wishing it will make it so!"), and the sad thing is that he is leading so many down the garden path on oil production.

Yes, he does seems to have an unrealistic "can do" spirit, doesn't he? And apparently has learned nothing from Ivan and Katrina, as I noted earlier in this thread.

I would not label his thinking on GOMEX as "full blown psychosis", but there are definitely indications of delusional fantasies :)

Also, if I were a Big Oil Company, I would be having second thoughts about the risks of "sinking" hundreds of millions or billions of dollars into new GOMEX deep drilling to extract the oil there.
Okay, Im a big picture guy.

For months this and other Peak oil sites have been stating the the entire oil and gas supply system is at capacity and is unable to grow to meet future increases in demands.

In fact there is concern that oil can not be increased enough to justify building new refinery capacity.  Those new refineries take too long to build and oil supply will drop (at least in the U.S.) before they are completed.  

I have read the above posts about other countries building refinery capacity but I assume a lot of that will be earmarked for that region.  Even if currently we import some of our gas from off shore.

The above scenario of looming shortages posted by PO people has always been offset by the likes of Yergin who state that there really isn't any supply problem.  Either long term or short term.  Capacity is sufficicent to meet demand.  Both crude supply and distillates.  We don't have more of both on the market because of price.  Increases in price will surely increase supply in the future if it looks like we have a shortage.  

And Yergin & Co. have said this will happen because there is still enough spare capacity in the system to cover short term emergencies or terror acts to allow the system to bring more supply on line.  With the resources going to either crude or refineries or both.

Okay so now we have the test case of Katrina which eliminated 1.3 mbd of crude and an equivalent amount of gasoline and natural gas because of impacted refineries.  All of a sudden Yergin changes his message and says "Oh but this is different because it impacted all of the system, not just crude oil'

Will someone at this site please explain this to me in plain language.  Either we had SPARE CAPACITY in the petroleum supply or we didn't. Since Katrina knocked out about the same percentage of Crude, Gasoline and NG supply all at once.  Why is this different than only knocking out one or two of those three?  Any surplus in the other streams wouldn't help you maintain supply.

I am greatly puzzled by this splitting of hairs in what constitutes surplus capacity.  Please explain.  Thanks.

Re: "Will someone at this site please explain this to me in plain language. Either we had SPARE CAPACITY in the petroleum supply or we didn't...."

Glad to oblige. I also try to be a "big picture" kind of guy. The short answer is that for many months now there has been no spare oil production capacity outside perhaps some additional heavy sour crude from Saudi Arabia -- which no one can refine at this point anyway. Of course, spare capacity must be understood as relative to current demand. I am going to replicate a post I made what now seems like weeks ago (but it was only Thursday).
Naturally, we are dwelling on the domestic US situation. But what about fundamentals in the world oil market. For example
  • Nigeria is completely unstable and production halts there are now routine.
  • Ecuador -- see Nigeria
  • Mexico has tipped this year, no longer an exporter
  • The North Sea is depleting at a rapid pace
  • Indonesia is foundering, no longer an exporter
  • Saudi Arabia is maxed out for light sweet crude
  • US production has just been reduced 1.3 mbd
  • Vulnerability in Iraq is now higher after Katrina (see Saboteurs briefly shut down Iraq's oil exports (Aug 22) for example)
My point is that even with our overwhelming domestic problems, we are still dealing with a shaky world market. Afterall, oil prices have been rising for months and months anyway, despite what Ali bin Ibrahim Al-Naimi says.

Don't get me wrong -- I love the Saudi Arabian Minister of Petroleum and Mineral Resources. But American exposure to foreign disruptions has never been higher than now.
My point about vulnerability revolves around the point that there is no excess capacity in the global market assuming no large drop-off in demand.

Thanks for response and I have read the posts religiously.  

How has Yergin said with a straight face in the past that we do have spare capacity.  Because this all seems to me to be the definition of peak oil, not post peak, just peak.  Any disruption anywhere reduces supply, that can't be replaced.

I know many of us at this site believe we are at or close to the peak.  I am trying to understand how Yergin is convinced we are not.

I see less inconsistency between Yergin's piece in the WSJ and his position in the past than others seem to. I don't think he's ever denied that crude supplies are very tight *this* year. He's just been arguing (I think implausibly) that they are going to loosen up very much over the next five years. In his WSJ piece, he's mainly emphasizing the refinery bottlenecks.
Actually, responding to NC and Stuart here, I see no inconsistency between Yergin's earlier statements and this latest missive in the WSJ. It's just that at the moment, he's a little freaked out not having anticipated what a Category 5 hurricane could do to GOMEX production.

NC, Yergin has consistently said that we do not have spare capacity now. The magical new capacity (much from unconventional sources e.g. Canadian tar sands) is coming online in the future.... He is not unlike Nostradamus in this respect. For example, for these oil-rich sands, the best estimates I've seen indicate an additional 4.0/mbd by 2020. I'm not impressed.

Nonetheless, his latest remarks still illustrate his delusional optimism.... See my earlier analysis in this thread of his WSJ editorial with respect to future GOMEX production, preparing for intense hurricanes, et. al.


In past production of oil and distillates, have we ever been in this position before?  Not being able to meet demand?  I don't count the late 70's.  That was an artificial witholding of supply.

Things get a little thin on the page as responses get deeper...

Re: NC's "Not being able to meet demand?"

Yergin is actually an historian of the oil business and knows better than I that there have been several such crises in the past.... However, what makes our times unique, in my view, is how large oil demand is now (about 84-85/mdb), how quickly it's been growing over the last couple years (+1.5 to 3.0/mbd/year) and the inelasticity of this demand. On this last point, we are simply talking about a crack-addict's evergrowing need for a larger fix (excuse the analogy, nod to PG). With respect to the increase in demand, Asia (mostly China and India) are now taking up "demand space" that formerly was the sole province of the developed "Western World". All of this is unprecedented historically -- it is all new. I don't see much resemblance between what is happening now and the 70's/early 80's. Since Yergin, Freakonomics author Steven Levitt and many other mainstream economists have a religious faith in free markets, they would not make, as I do, any distinction between earlier supply/demand crises and what is happening now. In that sense, their point of view is ahistorical whereas mine is not. I believe we are in an historically unique period which points to the phenomenon called "peak oil".

Old curse: "May you live in interesting times".
And this is the point isn't it.  We are talking about a global system, not just a domestic system.  There is plenty of evidence that shortages are already hitting a number of countries around the world.  Mostly poor countries that can't pay top dollar for their energy needs on the global market the way wealthier countries can.

It is interesting that we are seeing anecdotes of these inequalities on display right here in the good ol' USA.  Where coal is going to China (China has lots of dollars to spend) and possibly leaving some folks here in the US a little cold this winter.

Here's a question for someone with knowledge about the refinery business.  If some of these facilities have serious damage and essentially need to be rebuilt to a degree, is this an opportunity to configure them to handle the heavy or sour crude that seems to be sloshing around?  Or could they already do that?
Yes!  In fact there has been a lot of activity in this area within the past 5-6 years.  To handle more heavy and high-sulfur (sour) crudes, they need to add "hydroteaters" and "hydrocrackers" which are large vessels packed with catalyst.  In these, the heavy petroleum fraction and hydrogen react together to remove sulfur (hydrotreater) or break up the large molecules of the heavy crude into smaller ones (hydrocracker).  

Since both operations require hydrogen, these projects generally involve adding hydrogen units.  So it turns out to be a fairly expensive capital project.  

(Refiners traditionally made their hydrogen as a "byproduct" of catalytic reforming, to make aromatic octane boosters like benzene, toluene, and xylene.  But the EPA has set a limit on these, so now refiners have to make "on-purpose" hydrogen from natural gas, LPG, or naphtha, all of which are valuable by themselves.)


As Fire Treater points out, you add these processes to any refinery if you have H2.  It would be convenient to do it while they are down, but some of the equipment has year-long delivery times.
It's a morbid thought but what if the roustabout and other skilled people the GOM relied on are no longer alive.  The personality that would work out there is the kind the would tough it out rather than evacuate.
The kind who would tough it out likely removed themselves from the gene pool. j/k But seriously, that would just mean that we would be dealing with more dead.
I loved Daniel Yergin's THE PRIZE when I read it over ten years ago, and for a while considered him an expert in the history and economics of oil.  But after his COMMANDING HEIGHTS, it was down hill for him.  I don't know if it was all the consultation fees he started receiving from oil companies that spoiled him or what, but he really hasn't written anything good since.  

I sometimes get his Cambridge Energy Research Associates' reports at work and his analyses seem no better than any other Houston engergy consultant firm (like Purvin & Getrz, SRI, etc.).  Certainly not what you would expect from a Pulitzer Prize winner.  (And I am talking only analysis, not position on peak oil.)  

That's right, Fire Temple, he knows little more than other energy consulting firms or you and me, for that matter about the future course of events. What makes him "authoritative" is his unique position -- which he has arranged over time -- among powerful vested interests and therefore the mainstream media (MSM). Matt Simmons can't get the time of day from those assholes.
Of course there are more people in the world than just Yergin and Simmons. I'd be interested in knowing the positions of other oil analysts like the ones you mention. Yergin and Simmons are poles apart, but what is the consensus of the rest of the experts?
My suspicion is that most of the cornucopians are employed by private firms, and can't publicly express any point of view because of confidentiality and/or SEC issues. Most of the (non-anonymous) peak oil people are either academics or otherwise free to opine. I would be pleased to see a more balanced debate, but I think it unlikely.

Consider a veteran analyst/consultant and peak oiler: Henry Groppe of Groppe, Long, Littell. Nice charts at:

Halfin, there is one guy who is very well placed has warned about peak oil -- or at least oil supply issues -- for a long time and that is Kurt Wulff. Wulff was an oil & gas analyst with the late lamented stockbroking firm, Donaldson, Lufkin & Jenrette, for 16 years. His book, "How to Profit from the Coming Oil Crisis" is about 15 years old and its core recommendation -- to buy shares in domestic companies with long-lived natural gas deposits -- would have made excellent sense.  He now has his own independent equity research consultancy, McDep Associates. Stephen Leeb, an independent investment analyst and money manager who has something of a following among small investors, has also been warning about this, but is far less of a heavyweight and has been on the issue for less time. In my understanding of things, though, peak oil is still a minority view in the both the energy community and financial communities. I would agree that most oil industry analysts have been afraid to offend their customers who did not believe in peak oil, and understandably so. It's not just pandering; it's only human to keep your blinders on so you can get along and go along.
Halfin, another influential one who is late to the party -- but now more concerned than he used to be about peak oil -- is Philip Verleger, former chief economist of the Petroleum Industry Research Foundation. Certainly in his old incarnation as chief econoomist of a trade association, he promoted what was then the industry party line. That no longer appears to be true.