Extent of Damage to Energy Production In Gulf From Katrina Still Unknown
By Nell Henderson
Washington Post Staff Writer
Wednesday, August 31, 2005
Oil prices surged yesterday and gasoline prices were poised to top $3 a gallon by Labor Day weekend as oil companies and federal officials began assessing Hurricane Katrina's damage to the heart of the nation's energy production.
The powerful storm left the regional economy largely paralyzed yesterday across a swath of coastal territory in the Gulf of Mexico.
Nearly 3 million households, businesses and other customers were without power in Louisiana, Mississippi, Alabama and Florida, the Energy Department said. Telephone service remained erratic. Transportation of goods and people continued to be blocked by closed airports and seaports, flooded roads, and train tracks littered with debris.
Hurricane Katrina, recently downgraded to a tropical depression, could cause severe damage to the local and national economy if it seriously disrupts energy production for a sustained period, analysts said. The extent of the destruction was still unclear yesterday, as oil companies were having difficulty assessing the damage in an environment of power outages, impassable roads and disrupted communications.
The storm's effect on the nation's energy supply "is really the key to the impact on the economy," said Nigel Gault, U.S. economist at Global Insight Inc., a forecasting and research firm. "It is too early to tell. . . . We know what's shut down, but we don't know when it's coming back."
Katrina hit the Gulf states at a time when the regional economy has been thriving on rising energy prices and the national economy has been growing at a smart clip. U.S. energy company executives have reported soaring profit this year while complaining of labor and equipment shortages.
While the local economy will take a severe short-term hit, economists said the area will probably get a boost over the next year as insurance and federal money pours in to finance the reconstruction of homes, offices, roads, bridges, ports and other infrastructure. Workers from states with softer economies will probably flock to the area for the construction jobs. That occurred after four hurricanes last year in Florida, after the 1994 Northridge earthquake in Los Angeles and after Florida's Hurricane Andrew in 1992.
Such longer-term prospects were of little solace yesterday, as emergency workers continued to rescue and comfort the many families who suffered devastating losses of life and home.
Nationally, the clearest immediate economic impact was on oil prices, which climbed as the Energy Department reported that 95 percent of daily oil production in the Gulf of Mexico remained shut down by Katrina. More than a third of the nation's domestically produced oil normally comes from the Gulf.
U.S. benchmark crude oil priced for October delivery rose more than $3 a barrel to trade as high as $70.90 on the New York Mercantile Exchange before closing at $69.81.
Wholesale gasoline prices surged to levels that, if sustained, will translate to more than $3 a gallon at the pump within days, after typical retail markups are added, analysts said.
Stock prices fell as investors anticipated that higher energy costs will dampen consumer spending and corporate profit.
The storm closed at least eight U.S. oil refineries with the capacity to produce about 1.8 million barrels of oil products, or more than 10 percent of the nation's total, according to data compiled yesterday by Bloomberg News.
Marathon Oil Corp., for example, shut down and evacuated all its oil platforms and refineries in the area before the storm hit and just yesterday began sending employees back to estimate "what, if any, damage was done," spokesman Paul Weeditz said.
Valero Energy Corp.'s large St. Charles refinery near New Orleans still had no power yesterday, said Mary Rose Brown, senior vice president of corporate communications. It appears the facility has no major damage but will need some minor repairs. But it may take up to three days before the plant has power and up to a week before it can resume operating, she said.
Royal Dutch Shell PLC said two of its drilling rigs had "drifted off location" and would be towed in for repairs.
The Energy Department said yesterday it was considering one company's request for a loan from the nation's Strategic Petroleum Reserve, an emergency supply of nearly 700 million barrels of oil stored in underground caverns along the coast of the Gulf of Mexico. The department "will review any additional requests if they are made," spokesman Craig Stevens said.
The government loaned 5.4 million barrels of crude oil last year to refineries whose supplies disrupted by Hurricane Ivan.
But if the refineries are not up and operating, they will not be able to turn the extra oil into gasoline, diesel fuel, jet fuel and heating oil, analysts said.
Oil from the reserve "can prevent oil prices from going to $80 a barrel . . . but if refineries are off, it doesn't matter how much more oil they get -- product prices are likely to continue rising," said Jason Schenker, an economist at Wachovia Corp.
If the oil supplies and refinery operations resume quickly, then energy prices may spike temporarily and then come back down, with only transitory economic effects, analysts said. But if product prices stay high, that "is going to hurt consumers, particularly at the lower end of the income distribution," Schenker said.
The national price for regular gasoline averaged $2.60 a gallon yesterday, the same as the day before, said John B. Townsend II, the manager for public and government affairs for the AAA Mid-Atlantic auto club.
The group is forecasting that nearly 29 million Americans -- including about 450,00 in the Washington area -- will travel 50 miles or more this Labor Day weekend. And Townsend said motorists may "fuss and curse" at higher pump prices but are unlikely to change their vacation plans at the last minute.
Estimates of losses covered by insurance varied widely as carriers struggled to get adjusters into the affected area to assess the damage. Some computer estimates reached as high as $25 billion. That would make Katrina more costly than Hurricane Andrew, the most expensive storm on record, which caused nearly $21 billion in insured damage, valued in today's dollars.
However, a spokeswoman for the Insurance Information Institute, an industry group, said, "We're thinking in the $16 billion category," though she cautioned that no one really knows yet.
Louis Armstrong New Orleans International Airport, the city's largest airport, remained closed yesterday, although air traffic controllers working off power generators planned to open one runway for flights assisting the relief effort. Airports in Gulfport, Miss., and Mobile, Ala., remained closed due to water and debris damage and are likely to stay closed for several days, the Federal Aviation Administration said.
Amtrak suspended passenger service in the area until Sept. 7.
Freight railroad company CSX Corp. said its officials flew over the Mississippi and Louisiana shoreline yesterday to inspect their tracks and found much of the rail under water.
"It looks like we have rather substantial damage along the coast" from Pensacola, Fla., west to New Orleans, CSX spokesman Gary Sease said.
Staff writers Al Crenshaw, Sara Goo and Dana Hedgpeth contributed to this story.