Oil Supply Disruptions: Oil Supply Disruptions

OIL DISRUPTIONS ALMOST SEEM endless this year:

• Katrina
• Rita
• Explosions in the United Kingdom
• Pipeline attacks in Iraq
• Current Shut-in Status

According to the U.S. Energy Department, about 36% of offshore oil production and 27.16% of natural gas production in the Gulf of Mexico is still shut in. Onshore Louisiana, 40% of the pre-hurricane oil and gas output is still shut in, but that production is expected to be fully restored by the end of March, said the Energy Information Administration (EIA), the statistical arm of the U.S. Energy Department. Those numbers are as of Dec. 6.

The EIA forecast is for crude oil production shut-ins in the U.S. Gulf of Mexico to decline from about 504,000 bpd later this month to about 297,000 bpd by March 2006.

The EIA also said shut-in natural gas production should dive from December
levels of around 2.7 Bcf/d to 660,000 Mcf/d.

At that recovery pace, 19% of Gulf crude output and 6.5% of natural gas production would remain shut in as a result of damage from the powerful back-to-back hurricanes Katrina and Rita, the EIA noted in its Short-Term Energy Outlook for December.

What has this disruption meant in terms of gasoline and natural gas price?

Oil Supply Disruptions: Prices Skyrocketing

Both skyrocketed after the disruption. Unleaded gas prices have since declined to pre-Katrina levels, but natural gas is making new highs.

If you are a homeowner struggling to make ends meet, that is not a pretty chart. Heating bills might rise 50% or more from last year’s prices.

Of course, if you live in Miami, you just might not care much about this. Then again, perhaps your hurricane insurance is about ready to double.

Of interest to me is the Iraqi oil crisis: ( from the Internation Relations and Security Network )

“Iraqi oil exports fell to their lowest level in two years in November 2005. Bad management of the reconstruction effort, widespread corruption among government figures, and sabotage by insurgents are the reasons for the decline. Experts say that the U.S. strategy of military intervention in oil-rich regions can only diminish, rather than increase, the supply to world markets…

“Two-and-a-half years after the U.S. invasion of Iraq, the country’s oil industry is still in disarray. An official of the Oil Ministry in Baghdad told ISN Security Watch, on condition of anonymity: ‘We do not know the exact quantity of oil we are exporting, we do not exactly know the prices we are selling it for, and we do not know where the oil revenue is going to…’

“One of the reasons for the decline of the industry is a lack of progress in the reconstruction effort, due to serious managerial deficiencies.

“For instance, Halliburton subsidiary Kellogg Brown & Root was awarded a US$225 million contract, without a tender, to rehabilitate the Qarmat Ali Water Plant in southern Iraq, according to a report in the Los Angeles Times.

“The plant is used to pump water into the ground in order to build pressure that brings the oil to the surface.

“However, the contract did not include the repair of the pipelines carrying the water to the oilfields. When the water was pumped into the ground, the old pipes burst, spilling large amounts of water into the desert. In addition, farmers often tap the water pipes in order to irrigate their fields…

“Oil terrorism and corruption, if allowed to continue, will seriously harm Iraq’s future. The country’s economy, damaged by two Gulf wars, the 2003 invasion and 13 years of U.N. sanctions, urgently needs a period of peaceful reconstruction and the exploration of new oilfields. Only 15 of over 70 known fields have been developed properly. It usually takes at least five years to bring a new field into operation…

“Michael T. Klare, a professor of peace and world security at Hampshire College and author of the book Blood and Oil, wrote that it is ‘an article of faith among America’s senior policymakers — Democrats and Republicans alike — that military force is an effective tool for ensuring control over foreign sources of oil…’

“However, Klare concludes that ‘the growing Iraqi quagmire has demonstrated that the application of military force can have the very opposite effect; it can diminish — rather than enhance — America’s access to foreign oil.'”

Oil Supply Disruptions: Iraq Oil Revenue Myth

One of the myths of this war was that oil revenue would quickly pay for reconstruction of Iraq. Instead, it has reduced the flow of oil, uncovered zero WMDs, and led to a civil war between various Iraqi factions. The United States is, of course, caught in the middle.

Here is the bright side:

• Mobil is making record profits
• The S&P energy sectors have been on fire most of the year
• Halliburton execs get to pad their pockets with “free” taxpayer money.

Now, if you are in a group that benefited from those developments, our strategy in Iraq might be considered a complete success. On the other hand, if you are in the much larger group more concerned about the price of gas at the pump, perhaps you see things differently.

Oil Supply Disruptions: Explosions in the United Kingdom

In the United Kingdom, a “Massive Blaze Rages at Fuel Depot”:

“The man in charge of investigating the massive fires at a Hertfordshire oil depot on Sunday says the flames may have destroyed all clues to the cause.

“Deputy Prime Minister John Prescott has visited the scene of the blasts which injured 43 people, two seriously.

“The fire chief described the incident at the Buncefield fuel depot near Hemel Hempstead, after 06:00 GMT, as possibly the largest in peacetime Europe.

“The M1 finally reopened around 22:00 GMT, after being closed for 12 hours.

“Hertfordshire’s chief fire officer, Roy Wilsher, said: ‘The damage a fire of this intensity will cause may, or may not, leave clues for the fire investigation team.'”

It appears now that the blaze was accidental, as I actually suspected all along: “Police Call Oil Depot Explosions an Accident”:

“Explosions at one of Britain’s largest oil depots jolted an area north of London early Sunday, hurling multiple balls of fire into the sky, shattering windows and blanketing the area with smoke.

“Police said the blasts appeared to be accidental, though they occurred just four days after an al Qaeda videotape appeared on the Internet calling for attacks on facilities carrying oil ‘stolen’ from Muslims in the Middle East.

“The powerful explosions, felt throughout a large swath of southeast England, also rattled nerves in a country still jittery after July’s terrorist attack on London’s subway and bus system killed 52 people and four suicide bombers.

“Hertfordshire Chief Constable Frank Whiteley said there was ‘nothing to suggest anything other than an accident.'”

The heat might have been so intense that we never find out what happened, but accidents are not going to help prices any.

A far more serious question is: What happens if Iran goes to war with Israel?

Let’s first consider the likelihood of such an event.

According to The Associated Press, “Iran Military Begins Biggest Ever Naval Maneuvers”:

“TEHRAN, Iran — Iran’s armed forces began their biggest ever military maneuvers Friday to demonstrate ‘national solidarity,’ state-run television reported.

“The maneuvers in the Sea of Oman and the Indian Ocean are the same that a plane that crashed in Tehran on Tuesday — killing 94 crew and passengers — was heading to. They also come amid concerns over Iran’s nuclear program and its hard-line policy toward Israel…

“‘The maneuvers are aimed at testing the preparedness of the armed forces and demonstrate national unity in defending the country,’ a state-run TV announcer said without elaborating.

“Iranian President Mahmoud Ahmadinejad drew international criticism after saying Thursday that Israel should be moved to Europe and questioning whether the Holocaust took place. He has previously called for Israel to be ‘wiped off the map.'”

Now, I do not know about you, but threats to wipe anyone off the map seem rather unsettling to me.

“ISRAEL’S armed forces have been ordered by Ariel Sharon, the prime minister, to be ready by the end of March for possible strikes on secret uranium enrichment sites in Iran, military sources have revealed.

“The order came after Israeli intelligence warned the government that Iran was operating enrichment facilities, believed to be small and concealed in civilian locations.

“Iran’s stand-off with the International Atomic Energy Agency (IAEA) over nuclear inspections and aggressive rhetoric from Mahmoud Ahmadinejad, the Iranian president, who said last week that Israel should be moved to Europe, are causing mounting concern.

“The crisis is set to come to a head in early March, when Mohamed El-Baradei, the head of the IAEA, will present his next report on Iran. El-Baradei, who received the Nobel peace prize yesterday, warned that the world was ‘losing patience’ with Iran.

“A senior White House source said the threat of a nuclear Iran was moving to the top of the international agenda and the issue now was: ‘What next?’ That question would have to be answered in the next few months, he said.

“Defense sources in Israel believe the end of March to be the ‘point of no return’ after which Iran will have the technical expertise to enrich uranium in sufficient quantities to build a nuclear warhead in 2-4 years.

“‘Israel — and not only Israel — cannot accept a nuclear Iran,’ Sharon warned recently. ‘We have the ability to deal with this and we’re making all the necessary preparations to be ready for such a situation.'”

Mish, is there anything else that can go wrong?

As if that was not enough, there are indeed other possibilities. We could have terrorism in Saudi Arabia, perhaps even a governmental overthrow. Those too would be instant disasters.

Oil Supply Disruptions: Bottom Line

Should war break out between Israel and Iran, or if an overthrow of the government in Saudi Arabia were to occur, there is every bit the potential for the “mother of all oil supply disruptions” that would make Katrina and Rita look like Sunday cakewalks. It is probably best not to dwell on such things, as it is not possible to place accurate odds on such occurrences. The odds might be low, but I sure would not want to be short either crude futures or gold futures were they to happen.

Regards,
Mike Shedlock ~ “Mish”
December 21, 2005