Analyst addresses Katrina’s effects on energy production

John C. Felmy, chief economist at the American Petroleum Institute

4:52 p.m., Sept. 27, 2005--The high costs of gasoline and other energy products are basically the result of supply and demand principles, a top oil industry analyst at the American Petroleum Institute, said during a talk to members of Delaware’s agriculture community, Friday, Sept. 23, in Dover.

John C. Felmy, chief economist and director of the statistics department, made his remarks during a monthly breakfast meeting of the Friends of Agriculture at the Modern Maturity Center. A graduate of Penn State University and the University of Maryland, Felmy is one of the petroleum industry's leading commentators and has appeared regularly on network news and cable business reports.

While acknowledging that operators of individually owned gasoline retail outlets may have engaged in price gouging in the aftermath of Hurricane Katrina, Felmy said the real cause of record-high gas and oil prices is limited production and refining capacity that can barely keep up with surging worldwide demand.

“The price of crude oil is determined by the forces of supply and demand worldwide, and these conditions have been tight for several years,” Felmy said. “The demand is surging, and the supply system is struggling to keep up.”

Other factors affecting the price of fuel oil, natural gas and gasoline include political and economic uncertainties, such as the depreciation of the dollar, the postwar insurgency in Iraq, OPEC decisions, civil strife and weather conditions, Felmy said.

Under these conditions, the slightest change in production capacity can have a major impact on fuel prices and availability, Felmy said.

“We only had a 1-million-barrel-a-day spare capacity, and Katrina took that away from us,” Felmy said.

The Gulf Coast produces about 27 percent of the nation’s oil and accounts for 20 percent of its natural gas output. The region also accounts for 48 percent of America’s refinery capacity and 60 percent of its crude oil imports, Felmy said .

In the immediate aftermath of Katrina, 11 percent of Gulf area refineries were closed and 17 percent were producing at reduced rates. The storm also caused a loss of electric power to a pair of major pipelines that feed the Northeast and the Midwest, Felmy said.

“The industry took an enormous body blow when the Plantation and Colonial pipelines temporarily shut down,” Felmy said. “The shock could not have come at a worse time, and it caused a lot of panic buying over the Labor Day holiday.”

Felmy said that the price of gasoline, which, in the days after Hurricane Katrina, reached more than $3.20 per gallon in Delaware, is mainly influenced by several competitive forces faced by local retailers.

Felmy: “Federal policy significantly constrains the development of remaining energy resources and raises costs to consumers.”

“The prices reflect the retailer’s operating costs and the prices they paid for the gasoline, including federal, state and local taxes,” Felmy said. “As with crude oil, a disruption in supply, such a that caused by Hurricane Katrina, tends to drive prices up as retailers seek to ensure they have enough supply for consumers and enough money to pay for more expense gasoline deliveries in the future.”

Although the gasoline and heating oil prices are a source of major concern to consumers, Felmy said that such costs also have had a serious impact on agriculture.

“Farming uses a lot of gas, as well as diesel fuel, and fuel is used in the production of fertilizer,” Felmy said. “Farmers have been hit hard, and much less has been said about the negative impact of higher energy prices on the farming industry.”

Besides causing problems at the pump, the disruption in production caused by hurricanes Katrina and Rita also has raised concerns about the price and availability of heating oil and natural gas for an upcoming winter heating season, which is expected to be colder than normal in the Northeast, Felmy said.

According to the American Petroleum Institution, average costs for homes heated with natural gas, heating oil and propane last winter were $1,358, $1,280 and $974, respectively. Projected costs for the coming winter heating season are $1,901 (natural gas), $1,677 (heating oil) and $1,666 (propane).

“While you can import extra oil to make up for any loss in production due to the storms, you cannot do so with natural gas,” Felmy said. “If you lose production, it can be a real concern in the coming winter months.”

To help control heating costs, Felmy recommended that consumers clean and fine-tune furnaces, install insulation and seal window frames and outside surfaces.

Long-term solutions, Femly said, include accessing the abundant volumes of oil and gas resources beneath federal lands and coastal waters.

“Federal policy significantly constrains the development of remaining energy resources and raises costs to consumers,” Felmy said. “We need to open nonpark, nonwilderness onshore areas to responsible energy development and to reduce permitting delays, he said.”

Article by Jerry Rhodes
Photos by Kathy Atkinson

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