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Hurricanes Hate Oil Refineries

Written by Luke Burgess
Posted September 22, 2005

Dear Wealth Daily reader:

My girlfriend called me on her way home from work yesterday. She told me that she just filled up her car at $2.85/gallon. I told her to go back and fill up the trunk.

It seems that we're in for another gas spike. Gasoline futures have increased $0.31 over the past 6 days and just over a dollar from the year to date.

November futures rose to as high as $2.07 today, just $0.13 under the all time high set on September 1 in the wake of Katrina.

Hurricanes Hate Oil Refineries

As bad as Katrina hit the nation's gasoline supply, Hurricane Rita could be worse.

Katrina's damage was concentrated on offshore oil platforms and ports. But now the greater risk is to oil refinery capacity.

Rita, now the third most intense storm in recorded history, appears most likely to hit between the Port Arthur-Beaumont region and Corpus Christi, Texas, sometime between Friday afternoon and Saturday morning. There sits 20% of the nation's oil refining capacity.

Even at the minimum, oil refineries in Rita's path face short term shutdowns from power outages and flooding that will keep them offline for at least a week. Texas's entire refinery capacity lies in that at-risk zone.

In the event Rita hits Texas, the largest oil refiner in the U.S., disruption could be serious. That state alone has 26 refineries, largely along the coast, with a capacity of roughly 4.6 million barrels a day, or somewhat more than one quarter of the U.S. total. It's not just refineries that are vulnerable; five oil rigs were evacuated Monday in the eastern and central Gulf, where Katrina had already sent massive half billion dollar oil rigs off their moorings and laid waste to vital infrastructure. The conditions created by Katrina in the Gulf industry are "unmatched" in history, says Johnnie Burton, director of the federal Minerals Management Service. Since August 26, according to the latest MMS bulletin issued this week, Katrina has already caused the loss of almost five percent of annual Gulf production, or some 547 million bbls of oil.

That's a big bite out of the U.S. energy diet. The Gulf of Mexico produces about a third of the oil and a quarter of the natural gas consumed in the U.S. Katrina forced the shutdown of 95 percent of oil and 88 percent of gas production. Three weeks later, the industry has brought back online some 46 percent of oil production and 66 percent of natural gas. Oil production has been limited by damages to four refineries, which are not expected to be fully operational until next year. Pipeline damage has been harder to assess since divers and boats are a limited resource and now will be sidelined as Rita moves through the area.
- Time Magazine

When Katrina slammed into the New Orleans area, 15 refineries were shut down or damaged. They accounted for nearly 3.3 million barrels per day. Four of those refineries, with nearly 900,000 barrels a day of capacity, are still shut down.

No one knows what damage Rita will do.

But this time hurricane troubles could spread beyond the gas pumps. Natural gas prices will most likely experience a continued increase since so many of the offshore platforms off of Texas produce natural gas.

Today natural gas hit an all time high of $13.42/Mcf before cooling off to just under $13.

And while gasoline imports may have helped bring gas prices down from record highs, there isn't as much potential for natural gas imports.

Even the oil platforms off the Louisiana Gulf Coast could be affected by large waves churning up the Gulf of Mexico as the storm passes to the south. Experts estimate that waves of as much as 40 to 50 feet could hit the platforms off the Texas Coast.

Oil companies have already pull workers off platforms across the Gulf.

Fill your car up today and have a wood stove installed in your home. Unless you're long oil and natural gas, this winter isn't going to be pretty.

Alaska Pays a Dividend

I've always dreamed of living in Alaska. The fresh air, the beautiful scenery, the wildlife. And now I've just learned that it's even better.

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An oil royalty fund has been cutting residents checks each year since 1982.

Almost all Alaskan residents will receive a check in the amount of $845.76 this year as a share of the state's oil riches. The dividends fluctuant yearly. They have ranged from $331.29 to as much as $1,963.86 in 2000.

The checks are given out every year from an oil royalty account called the Alaska Permanent Fund. The fund was created in 1976 after oil was discovered on the North Slope. Some 603,080 Alaskans are expected to receive dividends this year.

The payouts are based on a five-year average of investment income derived from bonds, stock dividends and sales, and other investments. Anyone who has lived in the state for over a year is eligible.

Forget Baltimore, I might begin packing my bags.

A $185 Million Safer Flight

The U.S. government has made many changes to boost security since the Sept. 11. I'm sure you've noticed. During the last flight I took, one of my good friends had her fingernail clippers confiscated. And maybe it's just me…but I can't see how a 115 pound girl could hijack an airplane with a pair of fingernail clippers. But such is post 9/11 life.

In addition to federal works screening passengers, adding more undercover federal air marshals, forbidding items such as box-cutters (and fingernail clippers), and requiring airlines to install bulletproof doors on the cockpit, the FAA may require commercial airplanes to install cameras in the cabin and give wireless devices to flight attendants in order to alert the cockpit crew to an emergency.

The FAA claims that the cameras would add another layer of security. Cameras could give pilots a better idea of what's happening in the cabin.

The proposed plan for cameras has received much support from many aviation associations. However, pilots are less thrilled about the use of wireless devices. Among with the concern that the devices will interrupt with communications, they fear that they might allow people to send false alarms to pilots.

The FAA estimates the total cost of installing video systems to be $185.5 million over 10 years and would allow two years to install the cameras or come up with an alternative.

Companies such as Sanyo or Panasonic could benefit greatly from any such contract. Wealth Daily will keep you updated.

- Luke Burgess
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