Viewpoint: Hurricane effects shaking economic house of cards

StoryImage( ‘/Images/Story//Auto-img-112914810131859.jpg’, ‘Photo by Brock Hutzler’, ‘A flooded street in New Orleans, La., in the days following Hurricane Katrina. The after-effects of both Katrina and Hurricane Rita could be felt for some time as damage to oil infrastructure in the Gulf Coast is now believed to be much worse than was first thought.’);
StoryImage( ‘/Images/Story//Auto-img-112914830425241.jpg’, ‘Photo courtesy of’, ‘Federal Reserve Board Chairman Alan Greenspan recently "warned that Wall Street firms could become incapable of hedging all the risks posed by Fannie [Mae] and Freddie [Mac]," according to Comstock Partners’ commentary.’);

Hurricanes Katrina and Rita may prove to be fatal blows to the U.S. economy, which is entirely dependent on petroleum. That is because the damage from those storms to oil infrastructure on the Gulf Coast was much worse than was first thought.

Rita did extensive damage to offshore oil and natural gas rigs, which will delay planned drilling for new oil supplies to meet rapidly rising global demand. The Financial Times reported market intelligence firm ODS-Petrodata said Rita’s rampage near the Texas-Louisiana border will result in a shortage of rigs off the Gulf Coast. Rigs are movable and used for development and exploration, while platforms are fixed and used to pump oil from established offshore reserves.

The Times said the damage to rigs may also delay exploratory drilling in the Mideast. “Based on what we have right now, it appears that drilling contractors and rig owners took a big hit from Rita,” Tom Marsh of ODS-Petrodata told the Times. He said Hurricane Katrina hit mostly among mature oil and gas platforms, but “Rita came to the west where there is a lot of (exploratory) rig activity.”

U.S. Coast Guard spokesmen said nine semi-submersible rigs were loose from their moorings and were drifting. Many drillers, such as Global Santa Fe, Transocean, Noble Corp., Diamond Offshore Drilling and Rowan Companies, have reported missing or damaged rigs in the wake of Hurricane Rita.

Even before the storms, there was no surplus of rigs. They cost between $90 million and $550 million each, and they won’t be replaced soon. A rig ordered today to supplant a damaged or missing one will not be ready until 2008.

Mike Ruppert, publisher of From the Wilderness newsletter, commented: “The Bush administration is launching a conservation campaign. That must hurt. Ninety-seven percent of oil production and 80 percent of natural gas production shut in indefinitely. All this at a time when the U.S. must not only restore production but make up for every drop and cubic foot that was lost and then refill the Strategic Petroleum Reserve. New projects coming on line are going to be way less than the stock peddlers have told us. All this at a time when the global decline rate is about a million barrels per day. As much as the major media dance around all this, the writing is on the wall for the U.S. economy this winter.”

CNN reported several days ago that getting offshore oil and gas platforms back in service is proving very difficult. The network cited a report in The Wall Street Journal that efforts to restart coastal facilities are suffering from a lack of workers, helicopters and equipment.

The Federal Minerals Management Service said about 99 percent of oil production in the Gulf remains shut down. That’s about 1.5 million barrels per day. At the same time, around 80 percent of natural gas production, nearly 8 billion cubic feet per day, is still closed down.

Much of that was shut down before Rita hit, just as a precaution, but the Journal said production rebounded more quickly after Katrina and after Hurricane Ivan last year than it has after the later storm.

Tony Lentini, speaking for Houston-based exploration company, Apache Corp., told the Journal: “A lot of dock facilities that boats would leave from are gone. Hangars are messed up. Helicopter availability is tight.”

The Journal reported 13 drilling rigs are either sunk or badly damaged, paring the available rigs by 12 percent. Al Reese Jr., chief financial officer of ATP Oil & Gas Corp., told the paper: “Will it be more difficult to drill? Yes. Will it be more expensive? Yes. Will the end product cost more? You bet.”

Rita damaged seven refineries between Port Arthur, Texas, and Lake Charles, La. About 20 percent of U.S. refinery capacity is out of service because of damage from either hurricane. Even if all the refineries were back on line, it would make little difference because they lack oil to refine, due to pipeline damage. The condition of pipelines carrying oil from drilling platforms to the shore remains unknown.

The Journal said repairs may take longer than anticipated and will likely keep fuel prices high, reinforcing concerns about heating costs this winter. In part, that is pushing the Bush administration to present a national energy-conservation program, aimed at giving energy-saving tips to consumers, businesses and federal agencies during the winter. The administration has said little or nothing about conservation in the past.

The Department of Energy is urging such measures as adding insulation to your home or business, repairing weather stripping, putting timers on thermostats and taking other steps to conserve energy.

Comstock Partners, a mutual fund management company in New York, sees some storm warnings in the stock market. In its regular commentary, the company said: “The chances for a financial crisis at this time cannot be ignored. In today’s [Sept. 15] Wall Street Journal alone, there were three separate articles outlining the potential for some major problems. First, [Alan] Greenspan, [Federal Reserve chairman], warned that Wall Street firms could become incapable of hedging all the risks posed by Fannie [Mae] and Freddie [Mac]. Second, the New York Fed is meeting with a number of Wall Street firms to discuss credit derivatives risks. Third, the Treasury is worried about an acute shortage of 10-year Treasury bonds eligible to fulfill a September futures contract. All of this would not be happening unless the authorities were seriously concerned about threats to the financial system.”

From the Oct. 12-18, 2005, issue

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