ECONOMIC ANALYSIS:

Thinking 'Crude' Thoughts

by Fred Cederholm

Petro-politics, global instability, and energy gluttony have brought us here, and Katrina has pushed us to the brink.
I’ve been thinking about Murphy’s law, Katrina, the Strategic Petroleum Reserve, refinery capacity, priorities, and divine irony. "We got trouble folks, right here in River City [New Orleans]," but the trouble goes beyond Murphy’s Law, which states that "what can go wrong, will go wrong... at the worst possible time."

You see, the devastation that hurricane Katrina wreaked goes far beyond the damage and destruction to the coastal cities and shores of Louisiana, Mississippi, and Alabama. It goes beyond the loss of life, the destruction of homes, and the memories swept away. These tragedies are now the stories on page one and lead the nightly newscasts. They are the focus of FEMA and Red Cross efforts and will be for months to come. But less than 24 hours after landfall, the focus is already shifting, because the US just took a one-two punch to the gas tank!

I’m not saying this is what should be the case; rather I’m pointing out that this wake-up call is going to impact all of us in ways we can only now begin to anticipate. Petro-politics, global instability, and energy gluttony have brought us here, and Katrina has pushed us to the brink.

As pump prices set new records over recent weeks, there has been pressure on President Bush to tap the Strategic Petroleum Reserve (SPR) to fix the problem. This action was approved August 30th, but I fear it will prove to be nothing more than putting a band-aid on cancer. The SPR, the largest such reserve on the planet, now stands at about 727 million barrels in some 62 salt domes along the Gulf Coast in Texas and Louisiana, but it takes about 13 days to activate the flow into the marketplace once so authorized by the President.

The maximum drawdown capability is 4.4 million barrels per day (our daily national consumption now runs some 20 million barrels per day). The SPR now provides a 59-day cushion against imported oil shortages—down from 118 days in 1985. The recent Bush energy bill seeks to restore the SPR to the 118-day protection level, but only the "pork riders" added to that bill have received attention and publicity.

The need for a national oil reserve was considered by Truman and Eisenhower, but Gerald Ford created the SPR when he signed into law the Energy Policy and Conservation Act (EPCA) on December 22, 1975. The first deposit was made with oil purchased from the Saudis on July 21, 1977. Most recently additions to the reserve have been made using the Royalty-in-Kind (RiK) program carried out jointly between the Department of Energy and the Department of the Interior. RiK applies oil owed to the US government by producers who operate leases on the federally owned outer continental shelf. 12.5% to 16.7% of the oil produced (or the dollar equivalent) is delivered into the SPR. In effect, Uncle Sam is saving crude oil for a rainy day.

Katrina took down over 35% of US refineries—for God only knows how long.

One might think that we couldn’t get any wetter than we are right now, but a chain is only as strong as the weakest link. Just what are we going to do with the crude? The number of US refineries has decreased from 324 to 153 since 1981—a reduction of 52%. We haven’t opened a new refinery capable of processing 200,000 barrels per day in 25 years. The Texas City refineries have been plagued with breakdowns and fires this summer and Katrina took down over 35% of US refineries—those in Louisiana, Mississippi and Alabama—for God only knows how long.

The number of US refineries has decreased 52% since 1981.

We are not yet at a point where we know the full extent of the casualties and damages. Our first priority must be to provide those in need with food, water, shelter, and medical care. Order and infrastructure (water, electricity, telecommunications, and transportation) should be restored to the human sector before they are restored to the energy sector—care to wager on the likelihood of that?

One of this nation's largest oil refinery complexes belongs to Citgo, which is owned by the National Oil Company of Venezuela.

One of the nation's largest oil refinery complexes, far from the madding crowd of Texas, Louisiana, Mississippi, and Alabama, is in Illinois, and it is working just fine. It belongs to Citgo, which is owned by the National Oil Company of Venezuela (PDVSA)—Venezuela, the nation whose President should be taken out by our hit squads, according to preacher/pundit/"man of God" Pat Robertson. As ye sow, so ye reap. And who says the Almighty God doesn’t have a sense of irony?

I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.

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Copyright 2005 Fred Cederholm. All rights reserved. Fred Cederholm is a CPA/CFE, a forensic accountant, and writer who contributes the column "TH*NK*NG" to The Weekly Observer in Creston, (Ogle County) Illinois. He is a graduate of the University of Illinois (B.A., M.A. and M.A.S.). He can be reached at asklet@rochelle.net.


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This story was published on September 2, 2005.