More on rebuilding gulf oil infrastructure

Nearly all of gulf of Mexico oil and 80% of gas production, is "shut in" at present. This is adds up to 28% of total U.S. oil output and 14% of total U.S. natural gas output, according to a Whisky and Gunpowder report. And thanks to Whiskey and Gunpowder for this spectacular graphic of the capsized platform Typhoon!

It will not be possible to simply repair, rebuild and replace all the damaged infrastructure. It will all have to be redesigned and re-engineered from scratch, to a higher, and much more expensive, standard.

Here is why: The Houston Chronicle reports that that gulf oil infrastructure was built and insured for a "hundred year storm". It turns out that a hundred year storm, an oil industry definition, was basically equivalent to a category 2 to 3 hurricane. This is clearly insufficient and uninsurable now. To build to withstand a category 5 hurricane, platforms have to be build much higher and stronger, requiring more steel and more labor.

We may find that the capital to build all that stuff is not so easy to raise. Even the giant oil companies don't seem eager to spend their profits on last year's energy systems. For example, why would you build a new, state of the art refinery if you'll have to be begging for access to crude feestocks (of unknown quality) from foreign sources? As for production, the best fields will no doubt be brought back to production, but there must have been many gulf oil fields that were declining or approaching decline. These won't pencil out any longer.

The federal government has the greatest interest in getting Gulf production back online, and they will only be able to make that happen with federal financing and guarantees. The capital will have to come from foreign sources. Will other nations be eager to finance our energy infrastructure?

Maybe not:
a) all we do is waste our gas on SUVs - this is not a good return on capital
b) other nations are scrambling to build and secure their own energy supplies, at great expense
c) we have a huge and threatening military. Reducing our energy availability would de-power our military capability

So, I believe the gulf of Mexico won't ever come back to its pre-Katrina production level. How much will be brought back? Heck if I know.

Las Vegas Will Be Next

After Katrina there was a lot of people looking at New Orleans, saying "what a place to put a city, what were they thinking"? And now our President promises to spend unspecified hundereds of billions of dollars to re-build it. Well we can only hope that a safer city can be built. Above sea level at least. But New Orleans is not the only American city placed in the bullseye of catastrophe. Look at the American southwest, and most ludicrous of all, Las Vegas.

This post has been brewing in my mind ever since the hurricane, but was suddenly spurred by the news that MGM Mirage is planning "a $5 billion mixed-use monster on the Las Vegas Strip that will boast 18 million square feet of casino, hotel, condominium and retail space."

I know that it is easy to take pot shots at Vegas. But this is insane (read it here). Vegas will dry up and die, Bellagio, New York New York, all of it. It will not die in 3 days by flood, but it will happen over the span of 2 years, by fuel shortage, drought and monetary collapse. I'll try to stay calm and itemize my outrage and objections.

1) Being a resort town, everyone coming to Vegas has to fly across the desert. Did anyone notice that two more airlines just went bankrupt? Flying around the country will not be so simple soon. No one will hop on a plane for a spontaneous weekend of gambling.

2) Las Vegas' high rise hotels must be some of the most intensive energy and water use buildings ever. Fuel, electricity, and water will soon become prohibitive. The American southwest is dangerously drought prone. Global warming will bring drought to the southwest just as surely as it brings catastrophic hurricanes to the Gulf of Mississippi. There will be no source of water: all alternatives require large amounts of energy. Of course a drought and energy shortage will not affect only Las Vegas. Every city, from LA to San Diego, Phoenix, Santa Fe, and Denver, will suffer.

3) From a macro economic perspective, casinos don't add anything to the economy. They produce no value. They take money, albeit in an highly entertaining manner, they don't actually make it. When the Fed is spraying cheap dollars everywhere, you can benefit with a quarter million line of credit from your house. Then, sure it sounds like fun to go to Vegas and throw hundred away dollar bills while the lights flash and bells ring. But Americans won't have those throw-away dollars anymore. They will be spending it all on filling their gas tanks, paying health insurance, electricity and grocery bills.

So where will all those people, the actual citizens of Las Vegas, go? I think our federal and state governments should start preparing for mass migrations. The dust bowl all over again.

Natural Gas Depletion

In the kitchen of my family's summer cabin, where we have a propane tank to run the stove, you can cook, until all of a sudden the flame dims and its gone. Gas fields are like that - gone all of a sudden. With oil fields you can install a pump jack, and when oil is gone you can let it rest every other day, or something, and a little oil will squeeze out for a long time. My understanding is that gas is different, when its gone its gone.

The undersea pipelines off the gulf coast are worrisome. We have no idea of the extent of the damage. I read in the NYT about how the pipelines are made to be sort of 'disposable', in that they are automatically shut in places, with breakage links built in. The idea being you can't make them invulnerable to damage, but you can make them cheaper and easier to repair.
Or that’s my interpretation from here:
http://www.nytimes.com/2005/09/15/business/15gulf.html
This is a very interesting article, BTW, on how the gulf energy infrastructure will rebuild.
But huge underwater mudslides are a big deal. Suppose a wellhead is buried? I bet they'd have to re-drill.

I wonder what we'd do in this country with no adequate natural gas supply. I think we'd make synthetic gas from coal, or crude oil, much like Seattle's defunct gasworks (now gasworks park) did. It would be very expensive, but we need to keep those pipelines filled, stoves lit, houses warm, etc. But the electric generation from gas? That’s different - I wonder if it will be economical to run them on synthetic gas at all? And where else will we get electricity? Nukes maybe? We don't seem to have the time - gas will run out before we can get enough plants built. We don't have the money either - the US dollar will devalue soon, and we have no savings at all, as a nation.

We can import some gas in LNG tankers, but that is another huge energy infrastructure we'd have to build, and it only makes us MORE dependent on foreign countries for our energy supply.

Katrina Is An Economic Turning Point For The USA, And Therefore The Globe

This headline is a quote from the post below, I thought I'd elaborate on it. According to Matt Simmons and others, Saudi Arabia is the key producer of crude oil, and when Saudi oil production peaks, then the world peaks. The USA has the same role, but for dollars, as Saudi arabia has for oil. The world's economies have been growing on the supply of cheap credit that the USA is able to continually issue. Other countries issue bonds such as our treasury bills, but USA debt is the big one. US dollars are also the world's reserve currency and at present the only currency that international trades in oil can be made. So, oil and dollars are closely linked, in an inverse relationship. As the price of oil goes inexorably up, the value of dollars goes down.

The supply of dollars is about to peak, much as the oil supply is about to peak. There is little the US goverment (specifically the Federal Reserve Bank) can do about it. The Fed will not be able to flood the globe with cheap credit for ever. Lower rates, raise rates, issue more bonds, fewer bonds - it does not matter. Hyperinflation is fast approaching, and this is the depletion of money. Hyperinflation of the dollar is no different from the Saudis not be able to flood the globe with cheap oil for ever. Note that although the USA can issue more bonds we don't have the domestic captital to buy them. We depend on other countries to do that.

The best source of info on the US dollar crisis is FinancialSense.com.

And how will Katrina affect the US economy in such a drastic way? The US economy is not sound, by any means. The US stock market is overloaded with real estate debt. With no manufacturing base, and not self sufficient in energy or capital, we don't even have the resources we had in the Great Depression. September and October are generally the months when the stock market has major corrections and crashes. The combination of insurance losses and energy supply disruptions could easily tip the balance of the market and send us falling into recession. With a recession, will there be any way to avoid a real estate collapse? If we do hold on, then I can't believe there will be any economic growth. The best we can hope for economically will be economic stagnation, while inflation gradually gathers steam. If America's economic growth (entirely real estate driven) falters, then global economic growth stops also.

New Orleans is Gone

I have been in shock for the past 2 days. I cannot quite take in all the news from Louisiana and Mississippi. But at this point I am sure that Katrina is a very important event - not a world changing event in itself, but a turning point, an event that triggers many cultural and economic shifts that are ready and waiting. 9/11 was a politcal turning point, Katrina is bigger, it is a economic turning point for the USA, and therefore the globe.

Mayor Ray Nagins of New Orleans was saying it would be six months at least before they would get the city dried out and citizens could return. Well of course he has to say that, he doesn't get it yet. I don't think those people are ever going to get back. New Orleans is gone for good. Maybe they will save a bit of the french quarter as a little tourist village. Global warming destroyed New Orleans, and it is not going to cool down. Is the Army Corps of Engineers going to rebuild the levee and seawall system so half a million people can live below sea level? So they can sit and wait for the next category 4 hurricane? As the temperature in the gulf rises year by year? As the sea level itself is rising? This is very hard to believe. Who would insure it? They will probably build a new city on higher ground somewhere. I don't know the geography of the region. and all those smaller port towns, the ones destroyed will not be re-built. Towns not distroyed are living on borrowed time, and rising insurance rates, or the impossibility of getting coverage, will eventually make ghost towns of them.

The worst thing is that New Orleans will probably lose much of its industrial base as well. The many oil refineries surrounding the city, they were built in the 1950s through 1970s. They are obselete. They were built to process light sweet crude into relatively high sulfur gas and deisel. Now fuel standards are stricter, and crude feedstocks are dirtier. These refineries are barely profitable, inefficient, rust belt relics. They would require massive investment to upgrade them to process heavy sour crude. Oil companies might decide that the gulf coast is not the safest place to refine fuel, if the plants have to shut down for two weeks per year on account of hurricanes. Each mothballed refinery will become a toxic waste site.

And what about the drilling rigs out on the coast? No doubt one way or another, oil companies will find a way to get to that oil and gas, but it simply can't be business as usual. Oil production will not cease, but it will decline faster due to hurricane risk. Not all the wells in the gulf are equally profitable, and the recent dramatic increase in hurricane force changes the equations. Wells in or approaching decline will probably not be rebuilt. Oil rigs and platforms have taken enormous losses to hurricanes in the past two years and the ones that are rebuilt will have to be made very safe. This cost billions, and takes years. I keep reading about manpower shortages in the oil industry. Gulf shipyards that build and repair oil rigs are subject to hurricane risk. Probably only the most profitable rigs will be rebuilt, many will be abandoned.

All this will cause shortages in gas and oil, and refined fuels. Fuel will be very expensive. Katrina will jumpstart America's energy crisis.