IE 11 is not supported. For an optimal experience visit our site on another browser.

U.S. oil faces a perfect storm — and it's bigger than just one hurricane

When Hurricane Katrina struck in 2005, nearly all production in the Gulf of Mexico was knocked offline, making gas prices spike by nearly 50 cents a gallon in some parts of the country.
Oil Operations Off The Gulf Of Mexico As Rig Fleet Expands In U.S.
An offshore oil platform stands in the Gulf of Mexico near Grand Isle, La., on Feb. 8, 2018.Luke Sharrett / Bloomberg via Getty Images file

With Hurricane Delta bearing down on Louisiana and Texas, the nation’s oil producers are battening down the hatches — and analysts say a bigger storm on the horizon is how the pandemic has changed — perhaps permanently — the fortunes of the American fossil fuel industry.

Currently a Category 2 hurricane, Delta is expected to strike a stretch of coastline that houses an enormous amount of petroleum infrastructure. Operators in the Gulf of Mexico have reportedly shut down more than 90 percent of their operations in advance of the storm.

“Right where Delta is forecast to go is probably the highest density of rigs in the Gulf,” and in proximity to the greatest density of refineries in the country, said Patrick DeHaan, head of petroleum analysis at GasBuddy. “Normally, that would really impair the country.”

We apologize, this video has expired.

When Hurricane Katrina struck in 2005, for example, the impact was seismic: Nearly all production in the Gulf of Mexico was knocked offline by the storm and roughly 10 percent of offshore production capacity was destroyed. Refinery and pipeline damage caused shortages that spiked gas prices by nearly 50 cents a gallon in some parts of the country, and President Bush authorized a release from the nation’s Strategic Petroleum Reserve. American Petroleum Institute spokesman Richard Karp told the Council on Foreign Relations that Katrina created “the most dramatic impact of any hurricane that I can remember.”

If Delta had struck a year ago, the impact might have looked more like that: Drivers could have noticed a bump of as much as 25 cents per gallon of gas, but experts say Delta’s impact at the pump will be negligible — a few pennies, perhaps — because of the sharp drop in demand for everything from regular unleaded to jet fuel as a result of Covid-19.

“It’s a cheap year for drivers,” said Tom Kloza, global head of energy analysis for OPIS by IHSMarkit. “There are still tens of thousands of locations where it’s less than $2.” The average national price is roughly $2.19 a gallon for regular gasoline, according to AAA.

Kloza predicted that current prices are likely to persist for the next six months, at least. On the down side, this flattening of both supply and demand means consumers are unlikely to see the seasonal dip in gas prices that typically happens in the fall.

But a tranquil price picture for consumers is a tempest for the industry. “U.S. oil producers were having a pretty difficult time before Hurricane Delta, owing in large part to low oil prices,” said Samuel Burman, assistant commodities economist at Capital Economics.

The Dallas Fed’s third-quarter energy survey found that oil and gas executives only expect the price of oil to climb, on average, to $43.27 by the end of the year, a little less than $5 above where it was in mid-September. That’s below the $46 to $51 per barrel companies need to make in order to break even on new drilling.

If Organization of the Petroleum Exporting Countries (OPEC) decides in the next several weeks to pump more oil, as the cartel planned back in the spring when it laid out a three-phase response to the Covid-19-triggered plunge in demand, even that assessment might be optimistic.

“We suspect that low prices and producers struggling to source financing will mean that U.S. oil output won’t recover to pre-virus levels by end-2022, if it ever does.”

The industry also has to contend with the growing influence Washington has on its operations and its outlook.

Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics, said investors are apprehensive about the sector’s future, given the shift in political wins — in particular if Joe Biden wins the presidential election next month.

Kirkegaard said the shift towards renewable energy investment is an increasingly mainstream political position, as well as a key strategic gambit for Democrats. “The need of the Democratic party, particularly with a candidate 77 years old, to hold on to the youth vote is absolutely critical,” he said.

The Democratic party platform’s push for clean energy investment — being able to produce competitively priced energy from renewable resources such as solar and wind at scale — would pose a serious competitive threat to petroleum producers. Capital Economics predicted that embattled energy companies will have an increasingly hard time attracting financing, pointing out that bankruptcies in this industry haven’t slowed even though prices have risen from their April nadir.

And this could destabilize the industry’s ability to rebuild, sometimes repeatedly, in hurricane-prone areas. “The issue is if something bad happens. If there is extensive damage to industry installations then you have a situation,” Kirkegaard said. “This isn't just this storm, this is going to be every storm going forward.”

“We suspect that U.S. production may never return to pre-virus levels,” Capital Economics analysts wrote in a recent research note. “We suspect that low prices and producers struggling to source financing will mean that U.S. oil output won’t recover to pre-virus levels by end-2022, if it ever does.”