September 3, 2005
Katrina and An Oil-Based Global Economy
By: Rowan Wolf
President Bush is releasing crude oil to refineries from the Strategic Petroleum Reserve. Now, the International Energy Agency (a 26 nation member group which includes the U.S.) has decided to release oil from their reserves to the United States (Wa. Post, 9/03/05). They are not simply sending crude oil reserves to the United States, but oil products - namely gasoline. This is in recognition that 8 or the 9 Gulf refineries are out of service. One of the consequences of this is that gasoline prices in Europe are going to go up.
On some levels, this might seem to be a conundrum. If the US is unable to refine oil, then crude oil imports should drop which frees up more crude on the global market. One would think that this might actually drop prices to the rest of the world. Instead, the prices are going up - and a big part of that is speculators in the energy market. The move by the IEA is in part to "calm" the oil market.
However, my guess is that there is a larger reason behind that. That reason is that we live in a world of an interlinked global economy that is based on oil. A significant oil run up in the US has a significant economic impact on the United States. According to the New Era Investor, "A sustained price of $4.00 a barrel takes us up to 4.8% of GDP. ... This has a twin effect, one is to take away 1.7% of GDP away into the coffers of multinational oil."
In the world in which we live, a crash of any significant economy (and the US is the largest) would destabilize the economies of virtually every national economy on the planet. My guess is that if this event had happened in another "significant" nation, that the U.S. would bite the bullet and ship gasoline to them as well. No one wants to face the prospect of a global economic collapse. Unfortunately, it is not a question of whether it is going to happen, but when.
If the U.S. Gulf of Mexico system is significantly damaged, and the odds are that is the case, then a 30 day commitment of 2 million barrels a day for 30 days from the IAE is not going to eliminate the threat. It does postpone it, and perhaps other gas supplies can be secured. Therefore it is not at all surprising that Bush the oil man consume-as-fast-as you-can President is telling US drivers to conserve.
There is much more than the U.S. economy that is at risk in the aftermath of Katrina. Some have been put off by Bush releasing crude from the SPR and making that a big deal while folks die in New Orleans and surrounds. While the release is more strategic than effective, there is a larger issue here. The collapse of the U.S. economy would not just hit the rich - it would hit everyone. In fact, I think it will hit everyone. People far beyond the impacted Gulf Coast are going to die as a consequence of Katrina. Certainly part of that will be a result of profit gouging by big oil and the speculators whose riches are tied to escalating the market. But this is a global as well as a national concern. While I don't believe that the Bush strategy is based on concern for the poor and working class whose cost of living may double or triple this winter, an economic collapse is not good for his peers and corporate supporters either.
Meanwhile, the IAE decision to release refined petroleum products to the US is not a move without cost to the people of those nations. While it may or may not "calm" the oil market, those reserves (like those being released from the SPR) are going to need to be replaced. They are going to be replaced at a much higher cost than it went into the reserves. That is a cost that will be born by the people. It is a "hidden cost" of the oil-based economy.
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yes, I want to know how this will effect America
in 2006? How does this effect us in oil prices
from now til the end of 2005? who pays for it,
and who will make the money on this? thanks
Posted by: bob barry at September 3, 2005 5:33 PM
Bob, I'm not sure that there is a complete answer to that, but the predictions for the US for 2005 are - short term - that gas is likely to see $5.00 a gallon or above. I would not be surprised at above. Natural gas prices were already predicted to be between 30% and 50% higher than last year. They are also likely to exceed expectations.
Form what I read, the damage to facilities in the Gulf of Mexico are looking bad, and that lots of wells may need to be re-drilled, rigs and platforms replaced, hubs reconnected etc. Those are all expensive and time consuming tasks. Even if the refineries are not significantly damaged (and 8 of 9 are down right now) more than electricity is needed to get them going again. The workforce has to have a place to live and an infrastructure to support them.
Considering that, I don't see a significant improvement in 2006, and actually expect costs to continue to rise. If we continue to pull from the SPR to help "make up the difference," then we must replenish the crude reserve at the prevailing price - whatever that is. Supposedly, the oil is being "lent" to refiners, but when and how or if they "pay it back" is beyond the scope of my knowledge. The SPR is filled at tax payer expense. However, we are running on debt at this point and our primary "underwriters" are in Asia - particularly China which (I think) currently holds about 25% of outstanding US debt. So we could say that the nation's financing our debt are the ones who pay, but the reality is that it is the US taxpayer who stands surety for that debt - and the expense.
Posted by: rowan at September 3, 2005 6:07 PM