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Jeffrey Rubin

Jeffrey Rubin

Posted: June 29, 2010 10:55 AM

A Knockout Blow to Gulf Production

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Whether Hurricane Alex hits the Gulf oil spill or not, it's only a matter of time before one will. Alex is, after all, only the first storm in a year the National Oceanic and Atmospheric Administration (NOAA) is predicting will be an abnormally active one for hurricanes.

In case you'd forgotten, blow-outs of deep-water wells aren't the only strike against Gulf of Mexico oil production. It was just five years ago that the impact of severe hurricanes took an even heavier toll on the region.

Back then, BP and the other majors were confidently predicting that their offshore platforms could withstand all but "storm of the century" hurricanes. Those assurances turned out to be as valid as their more recent ones about the likelihood of deep-water spills. BP'S marquee Thunderhorse platform was easily toppled by Hurricane Dennis, leaving the billion-dollar rig leaning drunkenly in the waves -- a premonition of worse disasters to come.

It took almost five years for Gulf production to reach to pre-Katrina levels. Consider how much longer it will take Gulf production to recover, if it ever does, from the fallout of devastation caused by a blown-out deep-water wellhead that could remain uncapped over an entire storm season as severe as that of 2005.

Even the impact of a single storm would be catastrophic, forcing BP to disconnect its containment system for a minimum of ten days, thereby allowing the unfettered discharge of 600,000 barrels. That's a couple of spills the scale of the Exxon Valdez. And storm conditions would also suspend drilling activity of the relief wells, which are still months away from completion.

Even more devastating is the way a hurricane could disperse the existing oil slick. There have already been reports of oily rain in some locations along the coast. Imagine how many barrels of spilt oil a Category 5 storm could scoop up before it moved inland.

If raining oil on New Orleans doesn't curb America's appetite for crude, the resulting price shocks may. Not only do hurricanes threaten almost a third of the US's oil production, they also jeopardize some 40 per cent of the country's refinery capacity. That's a double-hit to motorists at the pump.

The shut-off of Gulf production during the 2005 storm season raised oil prices by about 10 per cent, but that was only a fraction of how much pump prices rose. With refinery capacity also sidelined, crack spreads (the difference between crude prices and refined gasoline prices) went through the roof. Actual pump prices rose by 50 per cent to $3 per gallon. Three years later, when Hurricane Ike laid a direct hit on the Houston refining area, a spike in crack spreads sent gasoline prices in surrounding states to as high as $5 per gallon.

The environmental consequences of Deepwater Horizon will take millions of barrels of oil out of future production. But the hurricane season threatens to rob us of even today's production. Between the two of them, America will no doubt be looking elsewhere to meet its energy needs.