FERGUSON’S FORECAST: Katrina’s Energy Legacy Remains Unknown

By Published On: September 9, 2005

Hurricane Katrina’s damage to the U.S. energy supply system – – oil and gas production facilities, pipelines, and refineries – – continues to be front-page news. The Minerals Management Service provides daily reports of shut-in production, reporting September 8 that 900,000 barrels per day of Gulf oil production remains off line, together with 4 billion cubic feet (Bcf) per day of gas. These are sizeable amounts but are only half the story. What has happened to consumption? As of last Friday, MMS reported that a total of 49 Bcf of natural gas had been curtailed because of the storm. My gas demand model indicated that if consumption had been as usual, only 8 Bcf would have gone into storage that week after accounting for the lost production. According to a September 8 report from the U.S. Energy Information Administration, however, gas storage increased a surprising 36 Bcf for the week, a +28 Bcf difference. Why was so much gas available for storage? My weekly estimates are accurate to about 10 Bcf, which could account for some of the difference. In the chaos, EIA’s reporting system may have overestimated the storage build, too. My guess is that gas consumption, which is much harder to estimate, also declined substantially. Gas-fired power plants were out of service. Pipelines that burn gas to pressurize the lines were down. Refineries were using less gas. And domestic use of gas in the affected areas was down, of course. At this time of year, the U.S. burns about 7 Bcf of natural gas per day, or 50 Bcf per week. Even if consumption decreased by 20 percent, which seems unlikely, one is hard pressed to account for the reported large build in storage. Given the uncertainty, energy markets appear to have adopted a reasonable wait-and-see attitude. Oil and gas prices have drifted modestly lower since the storm because of the supplies promised from around the world. Even after the apparently bearish gas storage report yesterday, gas prices hardly budged. The picture will become clearer as time goes by. But at the moment, it appears that Katrina treated the U.S. energy system a whole lot better than she did the poor folks along the Gulf Coast.

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