There is an excellent discussion of the Implications of a Ten Day Refinery Outage on The Oil Drum. I encourage everyone to take a look. The comments are good too. Here are a few snips.

Insight 4. It is likely that we will have product shortages for at least the next three to four weeks, because of shut in refinery capacity and reduced refinery runs.

We have said that it is likely to take a week or two to get refinery production up to pre-Ike levels. Suppose it takes 10 days. Adding 10 days to the date of the hurricane (September 12) brings us to September 22. If it takes an average of 18.5 days to get product from Texas to New Jersey by pipeline, it will take until approximately October 10 before supplies are back to normal. It could be a little shorter than this, or quite a bit longer.

Insight 5. One of the biggest refined product pipelines, Colonial Pipeline, is now reported to be shut down, because of lack of refined product input.

Colonial pipeline is one of the largest pipelines, with a capacity of 2.4 million barrels a day. It serves the Southeast and the East Coast.

Figure 3. Colonial Pipeline Route

Until Colonial pipeline is back to carrying full capacity of gasoline, diesel, and other refined products, there are likely to be shortages along the gulf coast and the Southeast. The Northeast may also begin to see shortages.

Other major outages have also been reported. Explorer pipeline, carrying 700,000 barrels a day of petroleum products from Texas/LA to Indiana, is completely shut down. Plantation pipeline, carrying 600,000 barrels a day of petroleum products from Louisiana to Virginia, is operating at reduced rates.

Insight 10. Because some areas are likely to be very short of supply, it is likely that gasoline prices would need to rise to $10 a gallon or more in those areas, to cut back demand sufficiently.

In some areas, there may be temporary shortfalls of 25% of more of gasoline supply. To allocate such short supplies would take a very high price. Government officials are not likely to let this happen. Instead, we are likely to see many stations that are completely out of gasoline, and other stations with long lines, selling at most 10 gallons per customer.

The Oil Drum offers 12 insights as to what is happening and what is expected. Here is my take.

Expect The Wrong Action From Bush And Congress

I do not know what price it would take to get efficient usage of fuel in this outage, but I suspect it is far less than $10. Clearly the drum is guessing, but so am I. What I do know is that the market should set the price and any price people are willing to pay is the fair price.

Letting the free market set rates would encourage efficient usages such as car pooling, taking public transportation, or canceling a 200 mile trip to take the kids to see dear Aunt Millie.

Unfortunately, the most likely government response is: “We will investigate and prosecute those engaged in ‘Price Gouging’.”

I also expect to hear “There is no shortage” and “Do not panic”. Finally the government will suggest car pooling and cutting unnecessary travel, but unless price forces the issue, too few will react. Instead they will react to the statement of “There is not shortage” and continue on their merry way to visit Aunt Millie.

Such unconcern will continue until there are no supplies and people are stranded with Aunt Millie, and/or rationing measures (an extremely inefficient way to regulate use) are put in place. I hope I am wrong about this but this is what the reaction in Katrina suggests.

Broken Window Fallacy

Another reaction I expect is hear will come from a bunch of clowns on CNBC all touting how Ike will provide a stimulus to the economy. It will do no such thing. And I may as well rebut the idea in advance.

Here is a snip from Bill Gross Wants Treasury To Buy Assets To Prevent Tsunami that discussed this very issue.


As long as we are dissecting Bill Gross we may as well take a look at a statement he made in his August Outlook called Mooooooo!

Make no mistake, the current conundrum that must be solved is: how to make the price of 120 million U.S. barns stop going down in price and then to make them go up again. That, however, is easier said than done.

One of the wisest men I know has this serious but admittedly impractical solution: have the government buy one million new/unoccupied homes, blow them up, and then start all over again.

One of the wisest men Bill Gross knows is a complete fool.

How many times does the broken window fallacy need to be debunked? A good writeup on the complete insanity of building houses and blowing them up, paying ditch diggers to dig holes just to fill them up again, or as some have proposed burying money and having people search for it can be found in The Broken Window Fallacy Reapplied or Economics in One Lesson by Henry Hazlitt.

Yes pipelines, refineries, and buildings will have to be repaired. However, those were productive assets already. Instead of putting money to work building new productive capacity, that same money now has to go to repair what has already been built. Economically this is not a good thing. Nonetheless, the one thing I am most sure of in this mess is a parade of complete fools will appear on CNBC telling everyone how Ike will “stimulate” the economy.

Mike “Mish” Shedlock
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