Air Date: Week of September 2, 2005

When the White House opened the Strategic Petroleum Reserves after the devastation caused by Hurricane Katrina, the price of crude oil fell but, at the same time, gas prices rocketed. Economist and energy analyst Jason Schenker of Wachovia Corp. gives LOE guest host Bruce Gellerman a primer on the Reserves and talks about the impact the hurricane may have on oil production and the economy.

Transcript

[CAR DRIVING BY]

GELLERMAN: It's Living on Earth. I'm Bruce Gellerman.

[CAR HONK]

GELLERMAN: By the time Hurricane Katrina hit here in New England it had just about run out of steam. There was some rain and wind, but the big impact here was at the gas pump.

GAS STATION ATTENDENT: Right now, when the Volkswagon backs out, pull in and you’ll be next…

GELLERMAN: Business was brisk at Jack’s Gas Station in Cambridge, Massachusetts. Usually, it’s cheaper here than most places. But not any more.

MAN: Since last night, it went from $2.71 to what it is now--$3.17)

GELLERMAN: Despite sticker shock, drivers were still lining up; grumbling but resigned to pay up.

WOMAN: I thought it was going to be three dollars and now I’ve come down and it’s $3.17 which is why I came down to fill up. President Bush has to let go of some of what we have in reserve. It will help the problem, it won’t solve the problem, it will help.

GELLERMAN: Well, President Bush did decide to tap the nation’s Strategic Petroleum Reserve and let oil flow into the marketplace. But while it pushed the price of oil down a bit, the price of gas went up. Jason Schenker is an economist and energy analyst for Wachovia Corporation in Charlotte, North Carolina.

SCHENKER: At this point in the game the real problem is with the refineries. There are power outages to the refineries. The fact that you don’t have electricity going to these refineries means even if you can get oil there, you can’t turn it into the products people use. So what we ended up with is the price of oil fell, while the price of gasoline, heating oil and jet fuel continued to rise.

GELLERMAN: So why open up the reserve at all?

SCHENKER: Well, this is really one of the only things that the government can do in order to help the situation. Plus, it does mitigate what otherwise could be an oil price push towards $80. Let us not forget that this did push the price of crude down, which might have otherwise have gone up, even if consumers don’t directly see that benefit.

GELLERMAN: But let me ask you about this Strategic Petroleum Reserve. I understand that it’s located in underground salt caverns?

SCHENKER: Yes. There are different salt caverns spread throughout Louisiana and Texas, and they hold, right now, about 700 million barrels of crude.

GELLERMAN: Louisiana?

SCHENKER: Yes.

GELLERMAN: So did any of it get wet?

SCHENKER: (LAUGHS) Well, that is not really, I don’t think, an issue. These are far underground…some of the most stable geologic formations available. When the U.S. government went to establish this system in the 1970s it used salt caverns because of the security of these caverns.

GELLERMAN: Seven hundred million barrels, huh?

SCHENKER: Yes.

GELLERMAN: We use about, what, 20 million barrels a day?

SCHENKER: Right now, yes, between 20 and 24, somewhere in there. Right now it’s about 21.6 million barrels.

GELLERMAN: So we got about 35 days worth of oil down there.

SCHENKER: Somewhere in that range. It’s not a lot of oil, and it’s sort of a mix of grades. It’s a mix of both higher and lower sulfur content oils.

GELLERMAN: So what are they gonna do? They’re going to pump it out and they don’t have a refinery to refine it. So what are they going to do with it?

SCHENKER: Well, some of it will go to refineries, obviously. But there’s usually time lag. By some estimates I’ve seen it could take up to three weeks from the minute the order’s issued to withdraw oil and then to actually physically remove it.

GELLERMAN: Well, when does it get to, you know, a dangerous point where we’re tapping too much of our reserve?

SCHENKER: Well, I think at this point opening it up is not that big a situation. I think one of the orders went in for 500,000 barrels. Even if we saw a number of millions of barrels come out there, I don’t really think that’s going to be a problem. Again, we’ve been continuously building this SPR for a number of years. We’ve expanded the capacity, and because of that we are now available to use it. This is one of those in case of emergency situations, and there’s probably no better time like the present than to tap those reserves.

GELLERMAN: With the loss of so much crude oil production due to the hurricane, what is the effect of this going to be on the economy?

SCHENKER: Well, there’s a few different things that’s going to happen. One of the things, of course – and again, a lot of this is going to deal with refinery product – is that it’s going to hit consumers. People often say that increases in energy prices disproportionately…well, they function as an energy tax. And I argue that they disproportionately affect the lower income individuals in a given economy, simply because energy expenditures as a percentage of their disposable income is far greater.

And what you can see is – and again, we’ve seen some of this recently – is energy prices have been on a significant bull run for a number of years. We could see, as we’ve seen in the past few months, different large discount chains sort of feeling some of the crunch. We could see some consumer spending come back. This could result in lower than previously forecasted GDP estimates for the third and fourth quarter by a few tenths or so.

GELLERMAN: This hurricane has really destroyed a lot of the petroleum infrastructure in the south.

SCHENKER: Well, although we do find that most of actually the key infrastructure – the Henry Hub is intact, the LOOP is intact, and the pipelines seem to be unaffected – we have had quite a few rigs that seem to be destroyed. Recent reports do show that there are perhaps more than 20 rigs that have been destroyed.

GELLERMAN: What’s the Henry Hub?

SCHENKER: The Henry Hub is where we have the natural gas exchanged nationally and that had actually been closed ahead of the storm and during the storm. And there was some concern that that could be damaged. But, as it turns out, the Hub is fine and reopened.

GELLERMAN: Boy, if this Hub had gone down, in the Northeast here where we use a lot of natural gas, we’d be in trouble.

SCHENKER: Yes, the Hub is critical, as is the LOOP. The Louisiana Offshore Oil Port was also not damaged, or not significantly damaged, which is very important. Offloads of about one million barrels per oil per day occur at the LOOP. And furthermore, this is the only port in the country where ultra-large crude carriers, also known as ULCCs, that carry three million barrels of crude, can unload. It’s the only place they can do it, and if either one of those, the Henry Hub or the LOOP, had been significantly damaged, we would have a much greater energy crisis on our hands.

GELLERMAN: I didn’t realize we were so vulnerable.

SCHENKER: Well, our energy infrastructure is placed in a region that is vulnerable to the weather. This is, of course, an extremely extraordinary storm – this is largest, most catastrophic storm ever to hit the United States by some accounts – and as such, such a rare event is difficult to price into the markets.

GELLERMAN: Well, Mr. Schenker I want to thank you very much.

SCHENKER: It’s a pleasure to have been here with you today.

GELLERMAN: Jason Schenker is an economist and energy analyst for Wachovia Corporation. He’s based in Charlotte, North Carolina.