Just when it was becoming cheaper for Canadians to fill up their cars, comes word from one CIBC economist that Hurricane Gustav will push gas prices up to $1.75 a litre.
Jeff Rubin, CIBC’s chief economist, says the storm, which is bearing down on the oil-rig-littered Gulf of Mexico, could force production to shut down and, as a result, drive oil prices higher.
“Only three years after hurricanes Katrina and Rita devastated Gulf of Mexico oil and gas production, an emerging hurricane storm is tracking another potentially lethal swath through America’s energy heartland,” says Rubin. “And with both oil and gasoline inventories much lower than when Katrina and Rita hit, the price consequences could be even worse this time.”
Gustav’s disruption will be temporary, admits Rubin, but there could be lasting impacts on future supply growth due to the hurricane damage.
“Protracted multi-year delays to marquee projects like BP’s Thunder Horse have meant that new production has grown at a fraction of earlier projections for the region and has lagged well behind rapid double-digit depletion rates that are characteristic of offshore fields,” he says. “The net result has been a multi-year, and now likely irreversible, decline in oil production from the region.”
Rubin points out that the production in the Gulf is still down about 300,000 barrels a day from its pre-Katrina peak, and could lose another 200,000 barrels over the next five years.
“Instead of ramping up production to over 2 million barrels per day as once dreamed by the U. S. Departments of the Interior and Energy, Gulf of Mexico production is likely to fall to a low of a million barrels per day by 2013 — almost a third lower than the region’s production prior to the 2005 storm season,” he adds.
Hurricanes damaging oil rigs is nothing new, but Rubin points out that these storms are getting increasingly more powerful and causing more destruction than ever before. The top five hurricanes that have been most costly due to lost production have all occurred in the past five years.
“Three months after Katrina and Rita hit, nearly 40% of Gulf oil production was still shut in. Together, Katrina and Rita damaged 167 offshore platforms and 183 pipelines,” says Rubin. “They also took offline as much as 25% of U.S. refinery capacity, 40% of which is located in the Gulf states.”
Rubin thinks that replacing the oil that’s lost in the Gulf won’t be easy. One option is drilling in the Arctic National Wildlife Refuge, but nothing will flow until 2018, and it will take another decade for the projected peak of 780,000 barrels a day to come on board.
“Whether we will see any oil flow from that or, for that matter, from the other Arctic deposits in Canada, Greenland or Russia by 2018 remains to be seen,” says Rubin.
Even if new oil in Alaska is in play, Rubin says U.S. production will decline by 600,000 in the next few years.
“There is no debate that at today’s oil prices, U.S. demand will continue to fall,” explains Rubin. “The question is whether demand destruction can keep pace with the destruction in supply.”
Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com
(08/29/08)