Saturday, September 10, 2005

..and The Chip Diller Award goes to ....

Chip Diller, uh..for those who haven't seen Animal, if you didn't see it in context, I won't be able to do it justice, although a picture might give some sense of the guy. Anyway, the nominees for The Chip Diller, Remain Calm, All Is Well Award, for the Katrina Crisis are:

1) The Media, for taking a well qualified assessment from Ben Bernanke and throwing out the qualifier: Headline: Hurricane Katrina to have 'modest' economic impact - White House adviser actual comment, My guess is though that as long as we find that the energy impact is only temporary, and there is no permanent damage to the infrastructure ... the effects in the overall economy will be fairly modest. Score one for Ivory Tower man

2) US Treasury Secretary, John Snow, who opines: While this will elevate spending levels for '06 -- primarily because that's when the major effects will hit -- we're going to stay on track with the president's deficit-reduction program. The Dude wonders just how many people, businesses included, from the Gulf are going to be filing income taxes any time soon.

3) US Commerce Secretary Carlos Gutierrez, after a big swig of the Kool-Aid, avers: There is unparalleled prosperity in this country because the president's agenda has been working. So that should give us a great deal of comfort that the presidents' agenda will continue to drive the economy in the future. "Unparalleled prosperity" is so late 90s, man.

Kidding aside, judging by the financial markets, outside of Gold, the effects of Katrina are just temporary. Call me kooky, but this reminds me, just a bit, of hubris, if not outright denial. Take a read of this more sober assessment, focusing on the crucial energy impact:

  • And offshore, the Coast Guard said 52 oil and gas production platforms sank in the storm and 58 were damaged.
  • Another three drilling rigs sank when Katrina rumbled through the Gulf of Mexico and another 16 rigs were damaged.
  • All together, the Minerals Management Service is reporting that some 900,000 barrels of oil a day and another 3.8 billion cubic feet of natural gas a day remain shut in.
900K barrels of oil a day is just under 5% of US oil demand and just under 18% of domestic production. In terms of running sums 900K/day comes to 6.3M/week and 27M/month, a flow which would empty the Strategic Petroleum Reserve in just over 2 years. Perhaps desirous of keeping oil prices down, the Bush administration in conjunction with other oil consuming nations, expects to release 2 million barrels a day of crude oil and refined gasoline from U.S. and international emergency government reserves to counter supply disruptions caused by Hurricane Katrina. (for a total of 60M barrels according to this)

Meanwhile down at the Port of New Orleans, Port of New Orleans President and CEO Gary LaGrange has set a goal for the Port of New Orleans to work its first commercial cargo ship by Wednesday, Sept. 14, 2005.

As I've said before, It's a complicated case, Maude. Lotta ins. Lotta outs. And a lotta strands to keep in my head, man. Lotta strands in old Duder's--...whoa, boy, almost lost my train of thought there. Anyway, it just seems to this aging Dead head, that the commercial, and by virtue thereof, financial impact of Katrina is more serious than a cursory read of the financial markets might suggest. At best, the Port will miss half a month of commercial traffic and more likely many months before it is fully operational. Going back to the Houston Chronicle article:
  • The company [Chevron] did issue a statement saying four of its Gulf projects will be sidelined into 2006 because of storm fallout.
  • Damage to Mars, Ursa, Mensa, Cognac and West Delta 143 [deep water drilling projects] is still being assessed, but ramping up production from several of those facilities does not look like it will happen before year's end.
It's a good thing there are no other risk factors in the oil market....oops. I read in the UK's Independent, Insurgents open 'southern front' with deadly car-bomb in Basra. Basra is the jewel in US occupied Iraq, exporting some 1.5M bpd. So, at the moment, the west is throwing some 2M bpd on the market, keeping prices down at cost of reducing reserves. Meanwhile India and especially China, awash in $ mind you, and likely aware of the risk of more aggressive insurgent attacks on the oil supply, can also buy at these reduced by intervention prices.

Did I mention that the financial aspect of the SPR release is a "swap" wherein the refiner or distributor promises to return the oil in a set amount of time. What happens is oil is say $80 when the swap comes due? How many of the businesses getting oil would be able to withstand that hit, assuming they didn't hedge? And we got a new Fed Chairman coming along any month now. Oh well, just call me Alfred E. Newman.

What me worry. Remain Calm, All is Well!

For those who just might want to worry a bit- who might be somewhat apprehensive about the financial system's ability to gracefully handle this disruption, here's an excerpt from Stratfor's sober assessment of New Orleans:

New Orleans is not optional for the United States' commercial infrastructure. It is a terrible place for a city to be located, but exactly the place where a city must exist. With that as a given, a city will return there because the alternatives are too devastating. The harvest is coming, and that means that the port will have to be opened soon. As in Iraq, premiums will be paid to people prepared to endure the hardships of working in New Orleans. But in the end, the city will return because it has to.