A storm in the energy markets
Even before Hurricane Katrina made landfall along the Gulf Coast early this morning, clobbering New Orleans and Biloxi, Miss., the storm was already wreaking havoc on the world's energy markets.
Overnight, crude oil futures contracts jumped around $4 to more than $70 a barrel—a record high—causing more than a minor scare on Wall Street. That's because if oil prices start trading above $75 a barrel, it "would conjure up the 'R' word," says Merrill Lynch economist David Rosenberg, referring to recession.
But as Katrina was downgraded in strength this morning and the storm shifted slightly to the east—which reduced the odds of mass destruction in New Orleans—global energy prices fell back slightly. In late-morning trading Monday, crude oil futures contracts were trading at slightly above $68 a barrel. That was enough to send the major U.S. stock indexes back up. In fact, the Dow Jones industrial average was up about 50 points in early-afternoon trading, which attests to the resiliency of the markets.
Nevertheless, just as the citizens of New Orleans (many of whom are holed up in the Superdome for shelter) aren't out of the woods just yet, neither are oil prices.
Even if New Orleans is spared from massive flooding, which is still a major possibility, the big concern on Wall Street is major damage in the Gulf of Mexico, which is home to nearly half of total U.S. oil-refining capacity. Currently, the Gulf of Mexico is responsible for 23 percent of all the natural gas output and 32 percent of oil production in the continental United States, according to Merrill Lynch analyst John Herrlin.
Though Katrina has been downgraded twice (from a Category 5 hurricane, the strongest possible, to a Category 4 and then to a Category 3 storm), it could still end up toppling offshore facilities, damaging submersible oil rigs, and tearing pipeline systems. Herrlin notes, for example, that last year's Hurricane Ivan, a significantly smaller storm than Katrina, knocked roughly 4 percent of the nation's oil and natural gas output offline for nearly nine months.
Already, President Bush is considering tapping the nation's Strategic Petroleum Reserve, the country's emergency oil inventory, should Katrina disrupt oil production, according to reports from the Associated Press.
But even if the administration takes that step, it probably won't help drivers in the short term. That's because it's the nation's refinery capacity that's in question, not oil supplies. Indeed, many are expecting the cost of unleaded gasoline to jump as much as 15 to 20 cents a gallon in the coming days, on top of already record-high prices at the pump.
advertisement
