/ 1 September 2005

Bush tries to cap surge in global energy prices

United States President George Bush on Wednesday ordered the release of crude oil from US strategic reserves as the White House sought to prevent the spike in global energy prices caused by Hurricane Katrina damaging the world’s biggest economy.

Amid fears that oil prices could continue rising to $80 or $100 a barrel, triggering a 1970s-style economic crisis, the president said he will boost supply.

However, he warned that US consumers may face higher prices and shortages of petrol.

”Our citizens must understand the storm has disrupted the capacity to make gasoline and distribute gasoline,” he said. ”A lot of crude production has been shut down because of the storm.”

The White House said on Wednesday night that it expects the hurricane’s long-term effects to be small, unless higher oil prices derail the economy. Preliminary estimates by insurers put the cost of the damage at at least $30-billion.

Bush’s decision made only a marginal dent in oil prices because the problem in the US in recent months has been a lack of refining capacity to turn crude oil into petrol and diesel.

While the price of crude edged back to just below $70 on Wednesday, wholesale petrol prices were up 20 cents a gallon to a record $2,68 in response to the shutdown of nine refineries on the Gulf Coast.

”It is now appropriate to talk of a major energy crisis after Hurricane Katrina pushed US energy markets beyond the edge,” Barclays Capital said in a report.

The Mississippi River basin is home to a 10th of the country’s oil refineries, churning out 1,8-million barrels a day, as well as to ports that handle large imports of grain and fruits and warehouses that stock a quarter of US coffee supply.

”Crude is not the problem,” said Deborah White at SG Commodities. ”The heart of the problem is how much refining capacity we have lost.”

While the worst hurricane on modern US record books, Andrew in 1992, ploughed through residential areas in Florida, Katrina has hit an energy and commerce artery.

As the region recovers from the impact of the storm, much attention will be focused on the oil rigs and pipelines.

Barclays Capital estimates that 20-million to 40-million barrels of refined oil could have been lost, but no one has been able to penetrate the flood waters to assess the pipelines. If the damage is worse than expected, it could push crude oil prices to beyond the 1980s oil spikes from the Iranian revolution.

Economists warn that the Mississippi region, already one of the US’s poorest, will not be as quick as neighbouring Florida to recover from the devastation. Mississippi Power said on Wednesday that 70% of its infrastructure will need to be rebuilt or repaired, and it will take at least four weeks to restore electricity supplies to affected communities.

”This area of the country is least prepared to weather economic fallout from a hurricane,” Dr Doug Woodward, from the University of South Carolina, said. ”They are not well insured. The rich will do OK because they can rebuild homes that are bigger and better, but the poor cannot.” — Guardian Unlimited Â