Dear Member of Congress:
We are entering the final weeks of the summer driving season, and I thought an update on fuel prices and the status of our industry’s infrastructure in the storm-hit Gulf of Mexico region would be helpful. Your constituents, like Americans everywhere, are feeling the pinch of higher gasoline and diesel prices and are concerned about the impacts of higher energy prices on the U.S. economy.
Crude oil prices hit a new record high (in nominal terms) of $61.28 per barrel on July 6, but since have moderated slightly, as the Gulf of Mexico’s oil and natural gas producing areas and refineries escaped major damage from three storms this month. Thanks to the extra efforts of the men and women of our industry, production and refining operations in the region have nearly returned to normal. Each of the three storms impacted our industry, but Hurricane Dennis presented the largest threat to production and refining infrastructure.
As a precautionary measure as uncertainty over the storm’s path rose, operators in mid-July briefly evacuated 44 percent of the Gulf’s manned platforms and 64 percent of rigs, which temporarily shut-in 96 percent of the Gulf’s oil production and 62 percent of natural gas output. Dennis, fortunately, had minimal impact on platforms and rigs, as the hurricane’s path carried it mostly over open water with no oil and natural gas operations. The U.S. Minerals Management Service reports that damage to oil and natural gas infrastructure from that storm was “extremely light.”
Even with these dangerous and unpredictable weather conditions, our industry continually provides consumers with reliable fuel supplies. Our refineries are operating at 93 percent of capacity, up from the prior’s week rate of 91.6 percent, as refinery operations on the Louisiana Gulf coast return to normal. Refiners continue producing and importing record amounts of fuel, with year-to-date gasoline production averaging 0.5 percent above last year, and diesel production up 5.7 percent this year. Gasoline inventories are essentially at the same level as this time last year.
Oil prices have been hovering over $59 per barrel, an increase of about $16.20 per barrel—equivalent to 38.6 cents per gallon—from this time last year. As of July 25, gasoline prices averaged $2.33 per gallon nationwide, down about 3.5 cents in the past two weeks, but 38.5 cents higher than a year ago. The U.S. Energy Information Administration (EIA) now forecasts that oil prices will remain above $55 per barrel for the remainder of this year and next, as the agency does not expect any loosening of the extraordinarily tight global oil supply and demand balance that currently is supporting high prices. Given these expectations, EIA forecasts gasoline prices will average about $2.30 per gallon through 2006.
Federal Reserve Chairman Greenspan addressed this subject in a recent statement to the Joint Economic Committee of Congress. He noted: The high price reflects the significant global demand for crude oil as well as the limited ability of oil-producing nations to expand their production in the short run . . . futures prices, which reflect the market’s expectations of prices six years hence, are around $55 per barrel. The small expected decline from current prices reflects the market’s view that the supply-demand balance for oil will not change appreciably over the medium term.
Greenspan wrote that the “U.S. economy seems to be coping pretty well” with higher energy prices, but estimated that the increase in oil prices since the end of 2003 likely reduced real GDP growth last year by 0.5 percentage points and would cut growth this year by about 0.75 percentage points.
These remarks should remind us that our nation faces long-term energy challenges, and more remains to be done to enhance energy security and secure adequate supplies of oil and natural gas for American consumers.