Gulf Oil and Gas accountACCOUNT

API Updates Congress on Restoring Industry Operations

Source: API 10/6/2005, Location: North America

Hurricane Rita struck the Gulf Coast region just as millions of Americans were coping with Katrina’s catastrophic impacts. Our industry was also hit hard by this once-in-a-century natural disaster, but we continue to work around the clock to restore operations and provide consumers with adequate fuel supplies. This letter updates our progress and also previews the winter heating season.

Our companies are making progress in recovering from the hurricanes, but much remains to be done. It is impossible to overstate the impact on our industry, particularly on the refining sector—20 percent of the nation’s refining capacity is today shut down or in the process of restarting. It is clear our companies face a difficult challenge in meeting demand for gasoline, diesel, and other products. It is a challenge we are meeting head-on—increased gasoline imports are supplementing domestic production, and fuels are flowing to consumers nationwide although in reduced volumes in some areas. Supplies will remain tight, however, until the country’s refining capacity is fully restored, which will likely take weeks.

Oil prices have hovered around $65 per barrel in recent weeks, but gasoline prices have fluctuated widely as a result of the storms’ impacts on refineries and pipelines. In the first week after Katrina, nationwide prices rose an average 46 cents per gallon because of the significant impact on key infrastructure but—as the industry restored some refining, pipeline, and production operations—prices fell 28 cents per gallon over the following two weeks. In the wake of Hurricane Rita, however, many of the region’s refineries and pipelines are out of service or operating at reduced rates, again pressuring an already extraordinarily tight supply-and-demand balance. As of October 3, gasoline prices averaged $2.98 per gallon nationwide, up 12 cents from the previous week. In addition, natural gas prices have spiked to record highs above $14 per million BTUs, double the price from this time last year.

Energy conservation and efficiency are critical components of a post-hurricane energy policy. We applaud President Bush, Secretary Bodman, and the Alliance to Save Energy and others for their recent calls for conservation and we, ourselves, are aggressively promoting conservation through full-page advertisements in major newspapers and in our other communications. We have urged common sense steps such as careful trip planning, proper car maintenance, efficient driving, and wiser use of energy at home. The potential beneficial impacts of conservation and efficiency should not be overlooked: noted energy analyst Daniel Yergin recently calculated that if all homeowners and commercial enterprises set their thermostats two degrees lower this winter, it would save more natural gas than was lost from Hurricane Katrina.

Even as we cope with the aftermaths of Katrina and Rita, the industry is preparing for winter. Inventories of heating oil, propane, and natural gas are above average for this time of year, but these inventories cost substantially more than they did last year, a factor that consumers could well see reflected in their bills. EIA projects significantly higher natural gas and heating oil bills than last winter: 71 percent higher for natural gas consumers in the Midwest, and 31 percent higher for heating oil users in the Northeast. Of course, weather and the pace of post-hurricane recovery will play a significant role in determining the supply-demand balance this winter. To help the most economically vulnerable cope with higher bills during this time of crisis, we urge Congress to fund the Low-Income Home Energy Assistance Program significantly above the FY 2005 level of $2.2 billion.

The tragedies caused by Katrina and Rita should not obscure the longer-term energy challenges we face: growing demand for energy at a time when oil-producing countries are increasingly limiting or restricting access to new resources; federal policies that deter the expansion of refining capacity; scant attention to energy efficiency; and a lack of national commitment to develop our abundant, untapped energy resources in Alaska, the Rocky Mountain West, and off our shores. These factors have resulted in a tight supply-demand balance for consumers, causing recurring price spikes, greater volatility, and strain on the nation’s energy infrastructure.

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