U.S. oil faces a perfect storm — and it's bigger than just one hurricane
With the Hurricane Delta in Louisiana and Texas, the country's oil producers are closing their hatches - and analysts say a bigger storm is on the horizon as the pandemic has changed the fate of the American fossil fuel industry - perhaps permanently.
Delta is currently a Category 2 hurricane and is expected to hit a stretch of coast that is home to a tremendous amount of petroleum infrastructure. Operators in the Gulf of Mexico reportedly shut down more than 90 percent of their operations before the storm.
"Right where Delta is likely to go is likely the highest density of oil rigs in the Gulf," said Patrick DeHaan, director of petroleum analysis at GasBuddy, near the highest density of refineries in the country. "Usually that would really affect the country."
For example, when Hurricane Katrina erupted in 2005, the effects were seismic: Almost all production in the Gulf of Mexico was shut down by the storm and around 10 percent of offshore production capacity was destroyed. Damage to refineries and pipelines created bottlenecks that raised gas prices by nearly 50 cents a gallon in some parts of the country, and President Bush approved a clearance from the country's Strategic Petroleum Reserve. Richard Karp, spokesman for the American Petroleum Institute, told the Council on Foreign Relations that Katrina caused "the most dramatic impact of any hurricane I can remember."
If Delta had struck a year ago, the impact might have been more like this: Drivers could have noticed a bump of up to 25 cents per gallon of gasoline, but experts say Delta’s impact on the pump will be negligible - a few Cent, maybe - because of the sharp drop in demand for everything from regular unleaded to jet fuel as a result of Covid-19.
"It's a cheap year for drivers," said Tom Kloza, IHSMarkit's global director of energy analysis for OPIS. "There are still tens of thousands of locations that are less than $ 2." The average national price for regular gasoline is around $ 2.19 per gallon, according to the AAA.
Kloza predicted that current prices are likely to persist for at least the next six months. On the other hand, because of this flattening of supply and demand, consumers are unlikely to see the seasonal decline in gas prices that usually occurs in the fall.
However, a calm pricing picture for consumers is a storm for the industry. "US. Oil producers had a tough time prior to Hurricane Delta, in large part due to low oil prices," said Samuel Burman, assistant commodity economist at Capital Economics.
The Dallas Fed's third-quarter energy survey found that oil and gas executives only expect the oil price to rise to an average of $ 43.27 by the end of the year, a little less than $ 5 above its mid-September level. This is below the $ 46 to $ 51 a barrel companies need to make to break even on new wells.
If the Organization of Petroleum Exporting Countries (OPEC) decides in the next few weeks to pump more oil, as the cartel had planned back in the spring when it envisaged a three-phase response to the decline in demand triggered by Covid-19, that assessment could be optimistic.
The industry must also grapple with the growing influence Washington has on its business and prospects.
Jacob Kirkegaard, senior fellow at the Peterson Institute for International Economics, said investors were concerned about the future of the sector amid the postponement of political achievements - especially if Joe Biden wins the presidential election next month.
Kirkegaard said the shift towards investing in renewable energy is an increasingly common political position and a key strategic game for Democrats. "The Democratic Party's need to keep the youth vote, especially with a 77-year-old candidate, is absolutely critical," he said.
The Democratic Party's platform's urge to invest in clean energy - to be able to produce competitively priced energy from renewable resources like sun and wind on a large scale - would pose a serious competitive threat to oil producers. Capital Economics predicted that competitive energy companies will find it increasingly difficult to find funding, pointing out that bankruptcies in this industry have not slowed, although prices have risen since their April bottom.
This could destabilize the industry's ability to rebuild, sometimes repeatedly, in hurricane-hit areas. “The problem is when something bad happens. When industrial equipment is badly damaged, you have a situation, ”said Kirkegaard. "This is not just this storm, this will be any storm that goes forward."
"We suspect US production may never return to pre-virus levels," wrote Capital Economics analysts in a recently published research report. "We suspect that low prices and producers struggling to raise funding will prevent US oil production from returning to pre-virus levels by the end of 2022, if ever it does."
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