Urgent need for energy restraint ... could another fuel crisis strike this winter?

Since November 2001, the US administration has been diverting crude oil supply from the market to the strategic petroleum reserve (SPR), which now stands at a record 700m barrels – in addition to the vast reserves held by the other 25 member countries of the International Energy Agency (IEA) club of industrialised oil consumers. The government has offered to tap those reserves as an emergency response to the massive supply disruptions caused by Katrina. But the SPR will not be much help. Releasing SPR crude will not offset a looming shortage of natural gas and, given refining constraints, will increase product supply by only a small amount. Its effect on prices will be marginal at best.

Perhaps the most worrying aspect of Katrina’s impact on energy supply is a massive loss of natural gas output. Roughly 8.5m cubic feet of daily production is shut in – about the amount of net injections into underground storage needed daily to build inventories to comfort levels by the October start of the US heating season. Should the shortfall continue, the US natural gas market could face shortages that releasing SPR oil would do next to nothing to alleviate. Heating bills would go through the roof this winter. This would also boost demand for oil products as a substitute boiler fuel.

On the oil side, the most pressing problem is a loss of about 1.6m barrels per day of refining capacity – about 10 per cent of the US total. Some of those plants have had to cut runs or face shutdowns because supplies have been cut off by the storm. A few Gulf coast plants will be able to take SPR oil as a substitute. For the rest, making SPR crude available is the wrong medicine. Even those plants that can run may have trouble bringing their output to market as product pipelines to the east coast are down due to power outages.

The SPR oil would be more useful if current crude production losses, which total roughly 1.4m barrels a day of crude output, outlast refinery outages. Production losses caused by Hurricane Ivan in 2004 took months to overcome and this year’s disruptions might dwarf those. But while tapping the strategic reserves might avoid or mitigate shortages, the effect on prices could be subdued if the market fears that SPR stocks are stretched. Prices might even rise as a result, as they did earlier this year when Organisation of the Petroleum Exporting Countries producers agreed to put more oil on the market – heightening market concerns about the lack of spare production capacity.

The second part of the emergency measures announced on August 31 by the Bush administration involves a temporary relaxation of Environmental Protection Agency emission standards for refined products. Assuming that there is enough spare refining capacity overseas, this might bring more short-term relief to US energy markets by allowing in more imports of products that would otherwise not meet US environmental requirements. This could be critical in satisfying gasoline demand. However, it might not be enough if supply concerns trigger consumer hoarding.

While it is too early to assess the scope and duration of the current outages, in a worst-case scenario US emergency responses might not be sufficient to alleviate an energy crisis. This could trigger a concerted strategic release across IEA economies, which would go some way towards easing international oil markets and might buy time for those emerging economies that are planning subsidy cuts.

Ultimately, though, energy security can best be achieved through strong, if unpalatable, medicine focused on demand restraint. Tapping strategic reserves, drilling environmental preserves or relaxing emission standards at the expense of air quality are short-term fixes. In the face of rising political risks in many producer countries, depleting reserves in OECD economies and weather disruptions elsewhere, we will soon have to come to terms with the need for drastic energy savings and efficiency gains. Already, soaring gasoline, diesel, jet fuel and residual fuel oil prices appear to be making a dent in demand – triggering restraint from consumers even before IEA economies consider mandatory ones. If there is any silver lining in this storm, this is it.

The writer is director of global energy at Eurasia Group, the research and consulting firm. Between 2001 and 2005, he was principal administrator with the International Energy Agency in Paris

Forum Comment

The two key issues that could tip us into another fuel crisis are availability and price ... whilst there will be a lot of work undertaken to ensure essential supplies the effect on prices is still unclear. What does seem clear though that where there is uncertainty there will be speculation and that may be enough to drive up fuel prices across the world by a substantial amount ... even with the SPR's being released ... and this may well provoke another fuel crisis in reaction just as we saw in 2000.

With petrol prices already at one of the highest levels in the world, political or production uncertainty in key producer countries are combining to create conditions that could well trigger real problems for many sections of the country, There was already been rumblings from various protest groups and indications of unrest in the ranks of haulage groups at the high price of diesel the likelihood of a reaction can only be increasing,

Effects of a Fuel Crisis can strike very quickly and affects many different parts of our Critical National Infrastructure. The cost of the crisis in 2000 was at least £1billion.

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