First is the energy shock to the US economy. The WSJ explains:
The best-case scenario, says Nariman Behravesh of forecaster Global Insight, is that oil, natural gas and gasoline supply are cut by only about 5% for several weeks. Oil prices rise to $75 a barrel, and then slip back to the low $60s. Gasoline prices go above $3 for a couple months and then fall back to $2.50 by year's end. That would shave economic growth by between half a percentage point and one full point later this year.
The worst case is that energy supply is reduced twice as much, and oil prices soar to $100 before sliding back to $70 by year's end and gasoline prices average -- ouch! -- between $3 and $3.50 a gallon for four to six months. That would cut GDP growth by as much as three percentage points, and bring the economy dangerously close to recession by year's end.
So which scenario is the most likely? "We're certainly not at the best case," Mr. Behravesh said yesterday. "There been quite a bit of damage. We're creeping towards the worst case -- but we're not there yet."
Unfortunately, as the NYT explains, the President's announement that the government will release reserves won't help the refinery and pipeline problems.
As many as 10 refiners have formally requested or informally contacted the government about using oil from the Strategic Petroleum Reserve, which currently holds about 700 million barrels of crude, according to Mr. Stevens, the Energy Department spokesman. He declined to identify them until their requests had been approved.
But one company whose loan was accepted on Tuesday evening rescinded its request yesterday afternoon. The problem is that no active refiners are in a position to increase their production to make up for the lost output from storm-damaged refineries.
"It doesn't matter that the government opens the strategic reserves because there is very little slack in the refining business," said Craig Pennington, the director of the global energy group at Schroders in London.
The WSJ provides a rough inventory of preliminary reports on widespread damage or outages due to power disruption to production, crude oil supply to refineries, fuel pipelines and terminals, and refineries. The impact won't necessarily be limited to the US economy and consumer confidence as they pay higher prices or wait in gaslines, as the FT reports:
Fears of an international energy crisis mounted on Wednesday as the scale of human and economic devastation caused in the southern US by Hurricane Katrina became fully apparent.
[...]
Some analysts cut US growth forecasts, saying soaring petrol prices would hurt consumer spending. “US [petrol] prices are now in the process of the most dramatic spike ever seen,” said Kevin Norrish, an analyst at Barclays Capital. “It is now appropriate to talk of a major energy crisis.”
[...]
With nine Gulf Coast refineries closed, US wholesale petrol prices hit a closing record of $2.65 per gallon, up 34 per cent since the storm, and supplies ran short in some areas. Chevron said it had started rationing gasoline across the south-east, a move analysts said could lead to panic buying, particularly ahead of the Labor Day weekend. US consumers have not seen shortages since the petrol station line-ups that followed the 1973 Arab oil embargo.
“We recognize that prices are high,” said Mary Rose Brown, spokeswoman for Valero, a top US refiner. “The market is responding to the overnight lossof almost 2m barrels per day of domestic production. Since the US is already dependent upon 1m BPD of imports to meet demand, there is a real fear ofshortages in the near-term. Pipeline outages due to power losses have exacerbated an already challenging situation.”
[...]
Governments have begun to worry that a looming US petrol shortage could affect their economies. Europe could see strong competition for limited refinery products. Wholesale petrol prices in Europe rose by 10 per cent. “If the assessment of the damage shows a severe crisis in the petrol sector, the crisis will not be limited to the US it will be a global one,” said Claude Mandil, executive director of the International Energy Agency, the consuming nations' watchdog.
The emerging markets are also likely to suffer, not only directly from rising energy costs but also from the knock-on effects of slower US and European growth. Even some of the oil exporting nations will feel the hit from rising prices. As Brad Setser noted last week before Katrina was a clear threat to New Orleans, some big exporting countries like Nigeria and Iraq, and even well-managed Malaysia, import large quantities of gasoline, which is then heavily subsidised at the pump.
The Economist offers this roundup of the possible ripple effects:
It would also be bad news abroad, where many nations, particularly in Asia, are already heavily dependent on robust American demand for their exports. Those countries are also being hit by higher oil prices. Indonesia's central bank was forced to tighten the money supply sharply on Tuesday, raising interest rates by three-quarters of a point and increasing banks’ reserve requirements, to stem a near-10% drop in the rupiah. Partly thanks to lavish fuel subsidies, Indonesia’s oil imports, financed in dollars, have touched off fears of a balance-of-payments crisis, driving the currency sharply downwards. On Wednesday, Indonesia's president, Susilo Bambang Yudhoyono, said that the government would need to curtail its fuel subsidies in order to stave off a currency crisis. While rich countries are much less dependent on oil than they used to be, thanks to increases in fuel efficiency and a shift from manufacturing to services, middle-income countries are still big energy guzzlers: India and South Korea use more oil per dollar of GDP today than they did in the 1970s.
There are also fears that Europe’s recovery could be choked off in its infancy by the steady upward march of prices for petrol and heating oil. That would weaken another of Asian exporters’ main markets and leave the world economy looking vulnerable. If Katrina has damaged America’s capacity to pump and refine oil, forcing Americans to shop abroad for more fuel to feed their appetites, it could be a long cold winter for everyone.
cross-posted at Liberals Against Terrorism
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