Boom2Bust.com

Congress Approves National Colosseum

Not really. But Capitol Hill politicians might as well allocate funds to build one, complete with chariot races and gladiators to keep us happy, considering the way they’re pandering to the masses these days. When Congress only has a 20% approval rating (Gallup), what else would you expect? Something like what happened today. Hoping to sooth the economic pain (and gain the electoral support) of Joe Six-Pack and Suzy Soccer Mom, both the U.S. Senate and House of Representatives, in a direct challenge to President Bush, voted to temporarily halt the shipment of thousands of barrels of oil a day into the government’s emergency reserve. The Strategic Petroleum Reserve, a system of underground salt domes on the Gulf Coast, was created by the U.S. government in the seventies as a precaution against major interruptions of oil supplies. With 701 million barrels in storage, it is currently 97% full, yet the equivalent of only two months of oil imports.

The Senate voted 97 to 1 in favor of suspending the shipments, which average about 70,000 barrels a day, until the end of the 2008. Only Senator Wayne Allard of Colorado voted against the measure. Presidential hopefuls Barack Obama and Hillary Rodham Clinton also voted to halt the shipments as well. John McCain was not present for the vote. Mirroring the same bipartisan support as in the Senate, the House voted 385 to 25 in favor of halting the program.

For some time now, Congress has wanted to tinker with the SPR, jawboning on and on about how curbing deliveries to and/or drawing from the emergency reserve (by the way, what part of “emergency” don’t you get?) can ease tight oil supplies, curb market speculation, and possibly lower crude oil prices. Case in point. MSNBC’s John Schoen wrote back on May 19, 2004 (that’s right, 4 years ago):

With oil prices stuck above $40 a barrel, attention has turned to the U.S. Strategic Petroleum Reserve, a vast stockpile of oil stored underground that the U.S. continues to add to. While Democrats call for releasing some of those reserves to help ease oil prices, President Bush Wednesday repeated his long-standing position that the stockpile should only be used in the event of a critical cutoff of fuel needed to maintain the country’s national defense…

“Since the price of oil is so closely tied to inventory levels, filling the SPR under these market conditions both depletes private sector inventories and pushes up prices for America’s consumers,” said Sen. Carl Levin, D-Mich., in a floor speech in April defending an amendment to defer SPR purchases.

More recently, New York Democratic Sen. Charles Schumer has introduced an amendment to draw 1 million barrels a day from the reserve for the next 30 days.

“Joey, do you like movies about gladiators?”

And Congress’ assertions that curbing shipments to and/or drawing from the SPR could help with our supply problems, dampen speculation, and lower oil prices? Wrong, wrong, and wrong, according to the experts (or, at least, people who know what they’re talking about). Regarding the supply problem, the 70,000 barrels that are being sent to the reserve on a daily basis represents only 0.3% of the 20 million barrels consumed by Americans each and every day. 0.3%? Can anyone tell me how this could possibly help alleviate tight supplies? Regarding the perception that high oil prices are caused by speculators, legendary energy investor T. Boone Pickens told attendees at the Oklahoma State University’s Energy Conference on April 23:

Only 5 percent of oil is in the commodity pool. If you did run it up, it would be briefly. Speculators cannot move it that much.

He would know. Finally, a number of politicians believe (or want us to believe) that halting shipments and even drawing from the SPR will somehow lower oil prices. CNN Money’s Steve Hargreaves wrote today:

A statement from Speaker of the House Nancy Pelosi, D-Calif., said it could bring down gas prices by as much as 24 cents a gallon.

Or so she claims. The CNN Money staff writer also wrote:

The U.S. Energy Information Administration predicts oil prices would fall by only about $2 a barrel - or shave 4 to 5 cents a gallon off the price of gas - if the president suspended deliveries to the SPR.

“It’s a very small amount” of oil going into the reserve, said EIA oil market analyst Doug MacIntyre. “And it’s very transparent to the market.”

Should I believe House Speaker Pelosi or the EIA? Tough call, right?

Here’s something to think about. A possible explanation for the high price of crude oil is that global demand is running at 87 million barrels per day, while the global oil supply is at 85 million barrels per day. Furthermore, while older oil fields are starting to go dry, no suitable replacements are being found. Finally, even though the U.S. economy is slowing, for every 1 barrel of reduced American demand there are 14 barrels of increased demand from developing countries like China, India, and Brazil.

Oh, but this just in…

“Middle East Oil Cut Off By Coordinated Attacks Throughout Region” and “Gulf Oil Infrastructure Destroyed By Category 5 Hurricane”

Well done. Thanks for saving me that nickel.

Sources:

“Senate votes to halt oil reserve shipments”
H. Josef Hebert
Associated Press, May 13, 2008

“House votes to stop adding to oil stockpile”
Tom Doggett
Reuters (UK), May 13, 2008

“Debate flares over strategic oil stockpiles”
John W. Schoen
MSNBC, May 19, 2004

“Oil stockpile a drop in the bucket”
Steve Hargreaves
CNN Money, May 13, 2008

“Pickens: Oil to go to $150 a barrel”
Jerry Shottenkirk
Journal Record, April 24, 2008

Jumpin’ Jack Flash, There’s No Gas, Gas, Gas!

MarketWatch’s Moming Zhou reported Monday that U.S. refineries operated at only 81.4% of their capacity in the week ending April 11, according to the U.S. Department of Energy. The last time this number fell below 80% was in October 2005, in the wake of Hurricanes Katrina and Rita. This takes place at a time when the Energy Information Administration (EIA) predicts the price of gasoline could surpass $4 a gallon in the upcoming driving season in some areas.

The culprit, said Zhou, is the record run in oil prices, which is rising much faster than gasoline prices. The gap between the price of crude and the price of gasoline and other refined products has pressured profit margins at refiners, so much so that earnings from downstream operations including refining slumped 62% for a group of 10 major U.S. oil companies in the fourth quarter. The first quarter may be even worse. Earnings for the three dedicated refiners in the S&P 500 Index are anticipated to fall 94% to just under $67 million from $1.2 billion a year ago, according to Thomson Financial.

Since their bottom line is taking a huge hit, refiners have decided to take more of their production offline and retool their plants this spring. Which explains why refineries are operating at only 81.4% of capacity. According to economist James Williams of energy-research firm WTRG Economics:

This is a maintenance season. If you can’t make a lot of money, you do a little more repairs.

Zhou said that spring is typically when refiners idle parts of their plants to undertake maintenance. But, she noted, “they don’t always cut back so drastically.”

Source:

“Refiners slow fuel production as profits drop”
Moming Zhou
MarketWatch, April 21, 2008

East Coast Hurricane

According to AccuWeather this afternoon, the East Coast of the United States could be in for a rough weekend. From their website, AccuWeather is saying that a low pressure system in the Atlantic is building up to become the first tropical system this year that may threaten the East Coast by this weekend. Later tonight the low could be upgraded to a tropical depression, the seventh of the 2007 Atlantic hurricane season. A shift in the jet stream will pull it toward the East Coast and contribute to its intensification. By the end of the week, the low could develop into Tropical Storm Gabrielle. The forecasting service is warning:

Residents and business interests along the East Coast from South Carolina to southern New England should be prepared for the potential development of the tropical system.

Elsewhere on the site it was reported:

As the system moves west or northwest, it will probably become a well-organized tropical system and could become a storm and even a hurricane. A consensus of the various computer models suggests a track toward the Carolina coast on Friday and Saturday.

AccuWeather’s severe weather expert Henry Margusity had this to say about the developing system in his “Meteorological Madness” blog this afternoon:

I had many questions on the storm, so let me answer from all.

1. Could this be another Floyd in regards to flooding? I don’t think so to that extent. I do think that if the storm hooks up with the front, we could have flooding of streams and creeks, but right now, I don’t think we will see the Delaware flood. It’s been a dry summer overall and if I remember correctly, Floyd occurred during a very wet summer.
2. Could Cape Code Get Hit? It will be close, but I think the storm will be turning out to sea and swiping Long Island.
3. Could it be a hurricane when it hits eastern Virginia and New Jersey? Yes it could be a cat 1 at that point, but most likely a tropical storm.

While I like the path that goes from Wilmington to Norfolk to Cape May then turning northeast out to sea, I can see the options of a storm just grazing the coast or even going as far west as I-95.

Here’s hoping that the low pressure system becomes a non-event. However, I bring up this topic for two reasons. First, in my June 28 post “A Different Kind Of Storm, Part 2” I talked about the major financial repercussions from a hurricane running rampant in this region of country. To recap:

A major hurricane making landfall at or near New York City will result in extensive flooding and heavy storm surges. Even a minor hurricane has the potential to submerge Lower Manhattan and the runways at JFK Airport. A direct hit on New York’s Long Island by a Category 3 or higher hurricane could cost $100 billion (as compared to Katrina’s $81 billion), according to a CBS News report last July 30. The same size storm hitting south of the City in central New Jersey would be catastrophic, with $200 billion in damages and lost business.

Second, in yesterday’s post I talked about the troubled National Flood Insurance Program. Already $20 billion in arrears from Hurricanes Katrina and Rita and designated a high-risk program by the U.S. Government Accountability Office, a storm packing a Katrina-sized punch would most likely require a taxpayer-bailout of the federal program.

Even if this low pressure system turns out to be nothing, in an era of increased hurricane activity, it may be just a matter of time before a devastating hurricane barrels up the East Coast and results in significant economic and personal tragedy.

Get Your Wallets Out

As the 2007 Atlantic hurricane season picks up steam with two Category 5 storms making landfall so far this year (a record), attention is being directed to the beleaguered National Flood Insurance Program. Run by the Federal Emergency Management Agency, it provides nearly all the flood coverage in the United States. The program was created in 1968 with the idea that it would offer subsidized rates in communities that adopted minimum building and zoning requirements. According to USA Today on August 29, over time the subsidized rates did far more to encourage development than to restrict it. In “Our view on coastal insurance: Help Gulf recover, but don’t subsidize the next disaster,” the editorial board explained how the program has backfired:

Political pressure has kept rates low, in effect forcing people in less vulnerable inland communities to subsidize people who live along the coast. And efforts at reform have been minimal. The program imposes no additional costs on properties that have been repeatedly damaged or destroyed. And a 1982 law that set some uniquely vulnerable undeveloped land off-limits to flood insurance has been undermined by exemptions granted to favored developers in congressional earmarks.

Hurricanes Katrina and Rita blew away any notions that the federal program could be self-sustaining, resulting in a shortfall of more than $20 billion. And guess who’s paying the bill? According to USAToday:

Taxpayers already have been called on to cover a Katrina-related flood insurance shortfall of more than $20 billion (in addition to much more for direct disaster relief they have provided). Washington is handling this in its usual manner — by borrowing from future generations.

After the deadly 2005 hurricane season, the Government Accountability Office added the federal insurance program to a short list of “high risk” areas in the government that the agency believes deserve urgent attention. Basically, the GAO believes that the National Flood Insurance Program is a financial disaster waiting to happen. It is likely they were aware of the long-range hurricane predictions of then-director of the National Hurricane Center Max Mayfield in September 2005. Mayfield told a congressional panel to expect more hurricanes large and small in the next 10 to 20 years. He believes that the Atlantic Ocean is in a cycle of increased hurricane activity that parallels an increase that started in the 1940s and ended in the 1960s. The ensuing lull lasted until 1995, then “it’s like somebody threw a switch,” Mayfield said. Hurricanes and tropical storms accounted for almost half of catastrophic insurance losses from 1986 to 2005.

With the National Flood Insurance Program $20 billion in arrears, hurricane experts predicting increased hurricane activity, and the GAO raising the alarm, what has Congress done? Not much, of course. According to the Associated Press on September 2:

Nearly everyone acknowledges it cannot pay off the debt, much less pay for losses in future storms. But so far, Congress has done little more than raise the program’s borrowing limit, essentially handing taxpayers a series of shaky IOUs… A failure to act could leave the public vulnerable to large bailouts of the program and help perpetuate a false confidence among some property owners that they do not need coverage.

Robert Hunter, a former director of the flood insurance program who now oversees insurance issues for the Consumer Federation of America, told the Associated Press that the early rhetoric was, “We’re going to fix this. We’re not going to tolerate this continued exposure of taxpayers to unlimited subsidies.’” Instead, says Hunter, “They’ve done nothing to fix it. It’s just unbelievable.”

Get your wallets out…

U.S. Cut Off From Oil Supply

Oil prices dropped earlier today as investors breathed a sigh of relief that Hurricane Dean spared key U.S. energy infrastructure in the northern Gulf of Mexico. The news sent crude for September delivery down $1.65, or 2.3%, to $69.47 a barrel on the New York Mercantile Exchange. October crude, which became the lead-month contract at the session’s end, closed $1.39 lower at $69.57 a barrel. In addition, energy stocks were pummeled as the storm premium unraveled. On the other hand, as I alluded in this Sunday’s post, the storm passed through Mexico’s Bay of Campeche, home to the giant Cantarell complex of oil fields and a significant concentration of Mexico’s oil production. No news regarding damage has been released as of yet.

Pemex, the state-owned oil company, withdrew 19,000 workers from 437 oil pits ahead of Hurricane Dean. As a result, 2.6 million barrels of oil per day and 80% of Mexico’s oil production are shut in. Mexico was the United States’ second-largest source of foreign petroleum products in May (the latest month for which statistics were available, according to the U.S. Department of Energy). The U.S. imported 1.6 million barrels of petroleum a day from Mexico in May, slightly more than Saudi Arabia’s exports to the United States but well behind Canada’s 2.5 million barrels. Mexico’s oil exports account for about 15% of U.S. oil supplies, according to MarketWatch. If 80% of Mexico’s oil production is now shut in due to Hurricane Dean, the United States is cut off from approximately 12% of its oil supply. Yet, Americans celebrate Hurricane Dean’s “close-call.” According to the Xinhua News Agency today, “Pemex stated it will be difficult to comply with its international commitments in the forthcoming days, in other words, its crude oil exports to the United States.” Pemex has oil reserves of 10 million barrels to help meet export contracts during the shutdown, said spokeswoman Martha Avelar in a telephone interview with Bloomberg today. Seeing that Mexico exported 1.79 barrels of oil per day in 2006, that leaves approximately 5.6 days’ worth of oil reserves available for export.

Talk about a potential U.S. economic crisis…

Sunday Edition: August 19, 2007

No More Weekend Editions
When I was in high school my English teacher (who bore a striking resemblance to Mr. Kotter from Welcome Back Kotter) had us read the book Iacocca: An Autobiography. For the younger readers out there, Lee Iacocca is a former CEO of Chrysler who is credited with turning around the carmaker’s fortunes in the 1980s after it was on the verge of bankruptcy. As a result, he became one of the most widely-recognized businessmen in the world. One custom that Mr. Iacocca shared in his book that really impressed me was that in spite of all his hard work, he was adamant in setting aside Friday night, Saturday, and Sunday for his family. Only on Sunday night would he crack open the briefcase and get a head start on the coming work week.

In tribute to Mr. Iacocca, instead of posting an occasional “weekend edition,” a “Sunday edition” will be posted on a regular basis from this point onward. Therefore, 6 out of 7 days a week you will now be able to find new material at Boom2Bust.com.

Thar She Blows!
After a slow beginning to the 2007 Atlantic hurricane season, Hurricane Dean is making headlines as it marches through the Caribbean. When I first saw that the projected path of Dean was shifting south, I was glad that the probability of the storm making landfall in the United States, especially in populated areas and/or in the vicinity of energy infrastructure, was diminishing. However, upon looking closely at the U.S. National Hurricane Center’s 3-day projected path, I noticed that the hurricane appeared to be headed in the direction of Mexico’s Bay of Campeche, located off the south-eastern coast of the country in the Gulf of Mexico. The significance of this area is that it accounted for 73% of Mexico’s total crude oil production in 2005.

The Bay of Campeche is the site of Mexico’s Cantarell oil field, one of the largest oil fields in the world, according to the Energy Information Administration (EIA). In 2005, Cantarell oil made up 60% of Mexico’s total production. Also in that year, Mexico was the second largest source of crude imports for the United States.

Energy markets have been volatile since 2004 and 2005 when hurricanes Ivan, Katrina, and Rita pummeled energy infrastructure on the U.S. Gulf Coast. The Gulf of Mexico accounts for roughly 1/3 of domestic U.S. oil production and more than 15% of its natural gas. Also, almost 1/2 of U.S. refining capacity is located in Gulf Coast states and is vulnerable to storm damage.

As I write this, Reuters is reporting that oil prices have tumbled over 1% in early overseas trade as Hurricane Dean appeared unlikely to disrupt key production and refining centers in the U.S. Gulf Coast region. “Oil prices are falling because Hurricane Dean is heading away from the U.S. oil centres. That’s the main factor driving down prices,” said David Moore, a commodities analyst at the Commonwealth Bank of Australia.

However, the U.S. National Hurricane Center is forecasting that while Dean could spare the U.S. Gulf Coast it could strengthen into a rare and potentially catastrophic Category 5 storm and slam into Mexico’s Yucatan Peninsula.
If Dean crosses the Yucatan and enters the southern Gulf of Mexico, it could disrupt oil production in the Gulf of Campeche and cause havoc in the global oil market. Earlier today Reuters reported that Mexico has already started to evacuate 13,360 workers from its Gulf of Mexico oil rigs. According to the state oil company Pemex, the impact of the evacuations on oil production will be known early Monday. A company spokeswoman said, “Production is currently normal, but this (the evacuations) will affect production. We will have an idea (of how much) early on Monday.”

Time’s Up
Back on June 21, I published “Housing Slump Ends In 2 Months.” The post focused on Bank of America’s Chief Executive Officer Kenneth Lewis, who told Bloomberg on June 19 that the U.S. economy will pick up speed due to a recovery in the housing sector. Lewis predicted, “You’ll see the economy begin to pick up in the third and fourth quarters,” and the slowdown in home sales is “just about to be over.” He went on to declare that the housing market will begin to improve in the next month or two, forestalling a recession. And I wrote, “It will be interesting to see just how Mr. Lewis’ housing prediction pans out 2 months from now. I’m circling August 19 on my calendar…”

August 19 is here, and the signs of an improved U.S. real estate market are missing. July new-home sales are predicted to have slowed to a 10-year low when announced later this week. Inventories of unsold homes on the market represent an 8.8-month supply at the June sales rate (last month reported), the highest inventory of homes for sale in 15 years. The slump has been made worse in recent months by turmoil in the mortgage market triggered by rising defaults by subprime borrowers falling behind on payments on adjustable-rate loans. Many of those borrowers are in or heading toward foreclosure, adding to the already large inventory of homes for sale and weighing on home prices. A wave of defaults has already forced banks to tighten mortgage lending standards, which will likely prolong the worst real-estate slump in 16 years. The weak housing market is also expected to weigh on economic growth in the second half of 2007 as demand falls for construction materials, appliances, and home furnishings.

Have a wonderful week,

Christopher E. Hill
Editor
editor@boom2bust.com

A Different Kind Of Storm, Part 2

Yesterday I talked about how the 2007 hurricane season forecast is for above-average activity, with the U.S. Gulf region once again a target. However, my greatest concern is the possibility of a major hurricane shooting up the Eastern Seaboard and making landfall in the New York City area. How likely is this scenario? A 1990 study by the U.S. Army Corps of Engineers said the 3 U.S. cities most vulnerable to hurricanes are New Orleans, Miami, and New York. The Associated Press on May 31 pinpointed 5 of the most vulnerable U.S. coastal spots, with New York City one of them. Joe Bastardi, the chief hurricane forecaster for AccuWeather.com, said that in past years with the same climatological patterns, “Some of those years also saw a storm break out of the pack and head up the East Coast, and we would not be surprised to see this scenario play out this year as well. Any storm that strikes north of Hatteras has increased potential to be a major one,” he said. Last year, Bastardi correctly forecast that the Gulf Coast would get “minimal” attention by that season’s hurricanes. According to ScienceDaily.com yesterday, University of Rhode Island Professor Isaac Ginis, who helped develop an ocean-based hurricane forecast model that has been the most accurate prediction tool at the National Hurricane Center, believes that the Eastern Seaboard may be at greater risk for a hurricane this year. Professor Ginis said, “We just finished an El Nino period, which results in fewer storms, but now we’re transitioning to La Nina, which favors storm development… We’re overdue here in New England for a big storm. Category 3 storms strike our region about every 60 years, and the last one was Carol in 1954.”

A major hurricane making landfall at or near New York City will result in extensive flooding and heavy storm surges. Even a minor hurricane has the potential to submerge Lower Manhattan and the runways at JFK Airport. A direct hit on New York’s Long Island by a Category 3 or higher hurricane could cost $100 billion (as compared to Katrina’s $81 billion), according to a CBS News report last July 30. The same size storm hitting south of the City in central New Jersey would be catastrophic, with $200 billion in damages and lost business. “And much of that disruption will not be covered by insurance,” according to catastrophe risk analyst Karen Clark. “It will be the largest financial disaster that this country has ever seen,” she added. Scott Mandia, a professor of physical sciences at Suffolk County Community College in Selden, New York, predicted in National Geographic News on May 19, 2006, that “There will be an economic shutdown for a few weeks, if not a month.” Nicholas Coch, a professor of environmental sciences at Queens College in New York City, added, “Should a hurricane close the port of New York and the New York Stock Exchange for a week or more, the damage to the nation’s economy would be more severe than that caused by Katrina.”

The socioeconomic impact of hurricanes in the United States is much more significant today than in years past because Americans have a love affair with coastal living. The U.S. Census Bureau estimates that 35 million people, or 12% of the population, live in coastal areas most threatened by Atlantic hurricanes. The number has more than tripled since 1950, and the Census doesn’t even count Northern coastal states, according to an Associated Press article on May 31. Margaret Davidson, director of the National Oceanic and Atmospheric Administration’s Coastal Services Center, told the Associated Press that, “When I was growing up on the Redneck Riviera, most of the stuff we built was built out of plywood, and you built it with your cousins on a weekend. And if it blew away, you got yourselves a keg of beer and you got your relatives together and you went out and built it again. And what we now have strewn across the coast is a bunch of McMansions.”

Contrary to what some economists would have you believe, natural disasters, such as hurricanes, do not benefit the U.S. economy. The dollars spent on reconstruction must come from somewhere- it doesn’t just materialize out of thin air. Money spent on reconstruction is money not spent on other projects, or on reducing government debt, or on tax cuts, etcetera. In the case of Hurricane Katrina, faced with the difficult choice of either reducing spending in other areas or borrowing money to pay for the recovery effort, the United States chose to borrow funds overseas, according to Peter Schiff in his book Crash Proof. Schiff said, “As a result, our external debt grew by that much more, exacerbating our current account deficit and representing a drain on our future consumption for generations to come. However, once foreigners no longer make their savings available to Americans, the real burden of natural disasters will be more apparent.” While hurricanes, like other natural disasters, may not in themselves cause a financial crash, they have the ability to hasten and magnify the pain of our “financial reckoning day.”

A Different Kind Of Storm, Part 1

In Boom2Bust.com, we’ve examined different threats to the U.S. economy. However, we must not forget natural and man-made dangers as well. One threat that I am deeply concerned about is that of hurricanes. The major forecasting centers are calling for above-average storm activity this year. However, complacency is evident in a recent survey by TripAdvisor.com, the “world’s largest travel community.” In a PR Newsire release on June 12, TripAdvisor reported that 92% of the travelers polled have not been influenced by predictions for an active 2007 hurricane season, compared to 89% in 2006. Granted, to date this year’s hurricane activity has been uneventful.

Yet, the National Oceanic and Atmospheric Administration places the odds for better-than-normal hurricane activity at 75%. NOAA is predicting 13 to 17 named storms. 7 to 10 of these storms will become hurricanes, and 3 to 5 will become major hurricanes. Colorado State University predicts that 17 storms will form, producing 9 hurricanes, 5 of which will be major events. The CSU team thinks one of those major hurricanes will probably make landfall somewhere on the Gulf of Mexico or Atlantic coasts. Another forecast team at North Carolina State University predicts 12 to 14 storms, 8 to 9 hurricanes, and 4 to 5 major hurricanes. The NCSU team foresees 1 to 2 hurricanes making landfall. Finally, AccuWeather.com expects 13 to 14 named storms, with 6 or 7 of these striking the U.S. coast. Joe Bastardi, the chief hurricane forecaster, says the Texas Gulf coast is twice as likely to be hit as in an average year and Florida appears four times as likely. Bastardi fears climatic conditions could lead to storms that intensify relatively late in their life when they are closer to landfall.

We all witnessed the devastation to the Gulf Coast region from hurricanes in 2005. Hurricane Katrina alone caused $81 billion in damage. New Orleans and other affected communities are slowly rebuilding. The U.S. Army Corps of Engineers just released a report which showed that large areas of New Orleans are still likely to be flooded in a major storm, according to the Kansas City Star on June 20. The petroleum industry has spent nearly 2 years trying to repair the damage from Hurricanes Katrina and Rita, rebuilding platforms, pipelines, and refineries in a region that produces roughly 25% of the nation’s oil and 15% percent of its natural gas. Those storms destroyed 113 of the Gulf’s 4,000 oil and gas platforms and damaged 52 others. According to the Atlanta Journal-Constitution on May 29, the Minerals Management Service, a division of the U.S. Interior Department that manages offshore leases, says the “vast majority” of production from 2 years ago has resumed, but it didn’t have precise figures. Analysts say gas prices are certain to shoot higher ($4 a gallon, perhaps) if and when the season’s first storm enters the Gulf of Mexico.

And what is the likelihood of hurricanes targeting this region in 2007? According to the Colorado State forecast team, there is a 74% chance at least one major hurricane would hit the U.S. coastline in 2007, with a 50% chance that it would happen on the U.S. Atlantic Coast and a 49% chance on the Gulf of Mexico Coast. Joe Bastardi in the Hurricane Season Forecast 2007 on AccuWeather.com predicts, “The highest area of risk has swung southwest from the Atlantic to Florida and the eastern and central Gulf Coast regions. In past years that exhibited the same climatological patterns we expect this season, these areas were the main target of Atlantic hurricanes and tropical storms.” Not what anyone wants to hear.

Believe it or not, it could be worse. Tomorrow’s post will focus on an area along the eastern seaboard that could result in the evacuation of 3 million people (more than six times the population of pre-Katrina New Orleans) and over $100 billion in economic losses from a Category 3+ hurricane.