As state and federal officials grappled with the massive human toll that Hurricane Katrina exacted on the Gulf Coast region, further assessment of the damage is indicating that the storm has wreaked havoc to key business properties along the Gulf Coast.
In positive developments, crude-oil prices eased early Friday morning in electronic trading and gasoline futures fell for the first time this week as several energy facilities on the Gulf Coast started up again for the first time. The front-month October contract on the Nymex Exchange fell 42 cents to $69.05 a barrel after rising 53 cents during trading on Thursday. However, crude oil contracts for November through February — traditionally high-demand months because of heating oil demand — were all trading above $70 a barrel amid worries that the storm had wiped out key refining capacity.

Eight major Gulf Coast refineries are still shut down and it is becoming increasingly apparent that at least several of those will require a month or more to restart. Moreover, early speculation is that there has also been significant damage to offshore infrastructure — i.e., pipelines, gathering hubs and production platforms — that could take several months to repair. Less than 20% of energy production within the Gulf of Mexico — which produces about a quarter of U.S. production — had been restored yesterday. In comparison, four days after the less powerful Hurricane Ivan storm last year, 60% of such production had been restarted.
Still, some good news was trickling in. Valero Energy Corp. announced that it had restored power to its refinery in St. Charles, La. and Marathon Oil Co. announced that its refinery in Garyville could be producing gasoline by next week. In addition, Houston-based Kinder Morgan Energy Partners LP announced that its Plantation Pipe Line Co. had resumed service at about 25% of capacity on Wednesday.
Whether a true energy crisis emerges from this natural disaster depends on how quickly the production and refining infrastructure in the Gulf Coast region is repaired, how well the oil and gas industry handles re-distribution of products to the various U.S. regions in the interim and whether there is a “run on the pumps” by the public as a result of a perceived shortage of fuel. Last year, Hurricane Ivan damaged key offshore pipeline infrastructure, which dampened production for several months and eventually was a key factor in an increase in crude oil from $44 to above $50 over a two month period.
What makes this energy crunch different from past ones is that it has been caused by damage to entire region’s integrated supply system. Unlike the energy crises of the 1970s or the run-up after Iraq’s invasion of Kuwait in 1990-91 that were based on constrained oil production, this situation involves natural gas, refineries and electricity. As Daniel Yergin points out today in the Wall Street Journal ($), the oil production that has been shut-in to date is far less than the markets lost when Iraq invaded Kuwait in 1990:

However, 16% of U.S. natural gas has been shut-in and 10% of U.S. refining capacity is under water at a time when there is no slack at all in the world’s refining system. The electric and natural gas distribution system in the region has also been knocked out. All of this has a knock-on effect: Boats can’t get out to the platforms without diesel fuel; and refineries can’t operate without electricity or people. . . . With communications broken down, companies are still trying to make contact with the missing employees who run the different parts of the energy infrastructure. As for electricity, a frontline manager summed up the problem: “You can’t overemphasize the absolute enormity of the undertaking to put this place back together again.”

Meanwhile, concerns are also increasing about damage to the critical Mississippi River shipping corridor south of New Orleans that allows deep-water ships to access the Port of New Orleans. Photographs and first-hand accounts from helicopter pilots, boat captains and engineers indicate that the main channel of the river remains intact, but that the surrounding nub of land around the last 20 miles of the river — knowns as the “Crow’s Foot” — was heavily damaged with about 100 barges and other vessels sunk or grounded in the river. The long-term navigability of the lower Mississippi and its main entryway for large ocean-going vessels — the 45 foot deep channel known as the “Southwest Pass” — is still undetermined and probably will not be known for at least several more days. And if things needed to get any more complicated than they already are, the media is reporting that a major oil spill near Venice at the southern tip of Louisiana near the mouth of the Mississippi River is a “potential environmental hazard.”
The Southwest Pass is extremely important to the economy of the region and other parts of the U.S. because it is the conduit for thousands of large ships that bring goods into the vast complex of docks, shipping terminals, grain-loading facilities and petroleum-processing plants that line the banks of the Mississippi between New Orleans and Baton Rouge. This massive shipping area is one of the busiest in the U.S. and coordinates the flow of much imported petroleum, export grain and huge amounts of other types of cargo such as from coal, rubber, steel, and chemicals.
Inasmuch as about 60% of U.S. grain exports go through New Orleans, wheat futures for September delivery have fallen almost 2% this week at the Chicago Board of Trade. Similarly, New Orleans is a main port for coffee imports, so coffee futures for December delivery have jumped nearly 10%. The loss of coffee imports sitting in the New Orleans port warehouses at the time of the storm could be the equivalent of a major frost in South American coffee-producing regions.
Finally, given the other emergencies, almost no analysis has been performed to date on the impact of the storm on the Gulf Coast region’s small businesses, which, in the aggregate, are the largest employer in the region. Virtually all of those businesses have been wiped out. Given the large exodus of people from the area resulting from the uninhabitable conditions, most of those businesses — most of which are service-oriented — will not be revived. Thus, those jobs simply will not be available for residents of the area for quite some time, adding another formidable obstacle to rebuilding the devastated Gulf Coast region.