Katrina's Impact on the Oil Industry From rigs to refineries to the prices at your local pump: We look at how much damage Katrina has done to oil production in the Gulf Coast region.

Katrina's Impact on the Oil Industry

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IRA FLATOW, host:

You're listening to TALK OF THE NATION/SCIENCE FRIDAY. I am Ira Flatow.

The flow of oil has been disrupted this week by Hurricane Katrina. And within a week we've seen--with the prices of gasoline skyrocketing at your pump, I'm sure you've seen that. So for the rest of the hour, we're going to get a report on the damage done by Katrina to the Gulf's oil operations. We'll talk about how that translates into higher prices at the pump and possibly how soon that might come down or what is the state of--how do you get out of the Gulf and where does it go to? Maybe you've been talking about that amongst yourselves. Well, you can talk about it with us. Our number: 1 (800) 989-8255.

Rayola Dougher (pronounced Dough-er) is a manager of energy market issues at the American Petroleum Institute in Washington. It's Dougher (pronounced do-er), I'm sorry. She joins us today by phone from her office there.

Welcome to the program.

Ms. RAYOLA DOUGHER (American Petroleum Institute): Oh, thank you for inviting me.

FLATOW: Oh, you're welcome. Your phone must be pretty busy these days.

Ms. DOUGHER: It sure is. It's ringing off the hook. It really is. We--it just doesn't even wait. The light just says red all day.

(Soundbite of laughter)

FLATOW: Let's talk about the oil. The president said today, and we saw some statistics, that the oil is beginning to flow a little bit more?

Ms. DOUGHER: Yes, it is. They're getting a number of platforms back up and operating. There's still a lot of shutting capacity, but the--relatively little damage done, well, compared to the magnitude of the storm. I think a number of people were pleased that it wasn't even worse than it was. But there's still significant production out in the Gulf. Every day it gets better. But still about 90 percent of the daily production in the Gulf of Mexico is shut in. And it's the equivalent of about, oh, I'd say almost 25 percent of total domestic production of crude oil shut in. So not only...

FLATOW: Shut in means shut down?

Ms. DOUGHER: Not producing.

FLATOW: Not produce...

Ms. DOUGHER: Not producing. And then we also have a lot of refineries out, shut down in the area. They're not turning out product. And they represent about 10 to 11 percent of US refining capacity of all the products put out there, the natural--I mean, the gasoline and distillates. And then we have another, oh, gosh, almost 16 percent of refineries around the nation operating on reduced runs because they're not getting the crude primarily from the Gulf. And that--a lot of it has to do with the electricity. And that's coming up. But there are huge pipelines that go up from the Gulf of Mexico into the central region in the country and up--a huge pipeline, Colonial Pipeline. It goes from the Gulf and feeds the whole Northeast all the way up into New Jersey. And that's been operating on reduced capacity. It's only starting to get back up and going. And as this electricity comes on especially over the weekend, I think we're going to see a lot of progress made quickly. At least everyone's very hopeful about that...

FLATOW: Tell us what happens at an oil rig when you get a hurricane coming into the Gulf. What goes on? Do they shut it down? Do they close the pipes? You know...

Ms. DOUGHER: They do. They have all sorts of...

FLATOW: ...what is going on there?

Ms. DOUGHER: They have all sorts of safety valves and pumps and you name it. They have to shut it off so that--and they evacuate these platforms, too. We have an estimated 30 to 35,000 workers on rigs in the Gulf. There are 4,000 oil rigs. So far, we have a an estimate that 41 of those 4,000 were damaged, most of them small rigs. So that's good. No injuries that we know of in terms of evacuating the employees from these rigs. But most of these people live and work in that region. And a big problem for the industry now is they're just searching for some of their employees too. And it's been very difficult...

FLATOW: Yeah. Yeah.

Ms. DOUGHER: ...for a lot of people, and they're trying to reach them, you know, they're trying to...

FLATOW: Yeah, I can understand that.

Ms. DOUGHER: Yeah.

FLATOW: We've also seen pictures of a couple of oil rigs just washing up on the surface.

Ms. DOUGHER: Sure.

FLATOW: What happens to the hole in the ground? Is oil coming out of the place they broke off at the bottom of the Gulf?

Ms. DOUGHER: They haven't even had time to really go underwater yet and see what's happened underwater to all those. But there's thousands of miles of pipeline underwater in the Gulf, and not all of those have been checked out yet either. The most they've gotten to do in some of these areas is get back on the rigs themselves, on the platforms, and start up some operations in some scattered areas. But they still have yet to determine the magnitude of the damage underwater. We really don't have a clear picture of that. There are a few slicks around, but we still don't know about that.

FLATOW: Yeah, there were some--there were talks of a couple of oil spills today. Can you fill us in on those at all?

Ms. DOUGHER: You know, I don't know of any today. The other day there was a spill of 800 barrels of condensate. It's a very light petroleum product and it dissipates very quickly in the water. But the Marine Spill Response crew was there and looking after that one. And I haven't heard of any other major spills. We do have a spill person who was in touch with the Coast Guard and others in the past hour or so...

FLATOW: Yeah.

Ms. DOUGHER: ...and they said nothing major, although there are smaller things going on that we're aware of.

FLATOW: Would it be fair to say that under the Gulf itself, there are all bunches of kinds of pipelines running down there that we never see?

Ms. DOUGHER: Thousands of miles of it.

FLATOW: Thousands of miles.

Ms. DOUGHER: Thousands of miles of it.

FLATOW: Are these buried under or are they on the surface of the sea bed?

Ms. DOUGHER: Now that's a good question. I'm not sure about that, how they handle those pipelines.

FLATOW: Yeah.

Ms. DOUGHER: I really don't know that question, if they bury them or...

FLATOW: That's the kind of stuff we ask on SCIENCE FRIDAY, those tiny, nagging details that no one ever can answer.

Ms. DOUGHER: Shoot!

(Soundbite of laughter)

Ms. DOUGHER: Got me!

FLATOW: How big are those valves inside those pipes?

Ms. DOUGHER: Oh, gee...

FLATOW: What's the diameter of the pipe, you know? All these geeky questions that we...

Ms. DOUGHER: Well, it's...

FLATOW: Our listeners want to know those answers.

Ms. DOUGHER: I know. They're great questions. And it's just, you know, I've worked here 20 years and I'm just continually stunned by some of the things I don't know. It's like...

FLATOW: It's a humbling experience, is it not? It certainly is for me. Are they any reports of damage to the pipeline that's down there at all? Do you know?

Ms. DOUGHER: I think the big pipelines, it's just really they have the reduced capacity because of the electricity. And they're not reporting any major damage. These are the big ones...

FLATOW: Yeah.

Ms. DOUGHER: ...that pump the crude and the products to market. And for them, they're doing well. It's just getting the electricity on and going. So that's going to be very good because--especially for people in the Northeast, Atlanta, and some other areas where there's sporadic outages for some. And this should help alleviate this very soon.

FLATOW: Let's talking about getting their refineries back on line again. You mentioned the employees that were evacuated...

Ms. DOUGHER: Yes.

FLATOW: ...and you need to find them and hopefully you can get them back to work. What else needs to be done?

Ms. DOUGHER: It takes awhile...

FLATOW: Do you need the electricity? Is it a power problem?

Ms. DOUGHER: You got electricity and you also--there are reports of some with saltwater damage. Now that can do a lot of damage if it's saltwater in terms of all the equipment and getting it back and running. You have to get rid of all the water in the area. And then you have to do all sorts of safety checks on every piece of equipment before you can start up again. And then it takes, from the time you get the barrel of crude oil into the refinery itself until you have a product, that would take about four days. So you're looking at, you know, possibly a week for some of these to get a really good picture of how much longer they're going to be out or will they all be back and up and running within the week? We just don't know.

Last year when Ivan came through, one of the refineries--you know, they were flooded, of course. And one of them had to--in their control room, they had alligators and snakes they had to clear out first.

FLATOW: Wow.

Ms. DOUGHER: So we just don't even know what some of them are going to face.

FLATOW: Right.

Ms. DOUGHER: Others have skeleton crews around. So...

FLATOW: Right.

Ms. DOUGHER: And we just don't have any picture of what really they've been going through for some of them.

FLATOW: You don't--1 (800) 989-8255 is our number. We're talking about oil and pipelines this hour, last part of SCIENCE FRIDAY, with Ray Dougher, manager of energy marketing issues at the American Petroleum Institute in Washington.

I'm about to ask you a question I haven't asked in 30 years.

Ms. DOUGHER: Uh-oh.

FLATOW: When I was working at NPR in Washington...

(Soundbite of laughter)

FLATOW: And, you know, I'm going to get the same answer I got 30 years ago, I'm sure.

Ms. DOUGHER: What's that?

FLATOW: The same question everybody's been asking you. Who's gouging our prices at the pump, you know? Remember that--deja vu all over again from me asking this question. As a reporter covering, you now, the energy crisis in the '70s, I was asking the same question.

Ms. DOUGHER: You know...

FLATOW: And that's what everybody wants to know.

Ms. DOUGHER: Oh, sure. And, you know, what's happened, of course, is that we've had a severe supply disruption for a major portion of the industry, those statistics I just gave you. And the producers, the refiners, the operators, the retail outlets, they're all trying to adjust to this really big reduction in their supplies. They're scrambling to get supplies to their customers. But, you know, ultimately, there are about 168, almost 170,000 retail outlets in the United States...

FLATOW: Yeah.

Ms. DOUGHER: ...and less than 10 percent of them are owned by refiners. The rest are independent businessmen and women. They're making their business decisions every day. And--you know, and many states have price-gouging...

FLATOW: Yeah.

Ms. DOUGHER: ...laws.

FLATOW: Yeah.

Ms. DOUGHER: And some of them have already instituted emergency procedures to halt any really sharp increase in price. But it really is a logical market response to a scarcity. And we're seeing that.

FLATOW: From reading between the Washington lines here, it's basically you're saying that the individual owners are taking you for a ride.

Ms. DOUGHER: No.

FLATOW: The gas station attendants, you know...

Ms. DOUGHER: No, I don't want to imply that. It's more complicated than that. You know, it's all the way up the distribution chain. If you think of first the producers are--their production is cut, and then you get to the refiners, they're output is cut. And then...

FLATOW: But don't you pay for oil, like, a month in advance for what you know you're going to be getting? You pay a price for a certain future of oil, you know...

Ms. DOUGHER: Sure. Sure.

FLATOW: ...what--and it's locked in for the next month?

Ms. DOUGHER: Sure, but then the scarcity occurs and then the customer whose source of supply is gone is going to someone else that might have supply and willing to offer a higher price for that same supply. And this is what's happening. People are scrambling in the marketplace. And it's lots of decisions, thousands and thousands made every day, that are pushing that price upward. It starts with the crude. Most of what we spend at the gasoline pump is the cost of the crude oil alone.

FLATOW: Right.

Ms. DOUGHER: And that was what? That was around $70 this week, wasn't it? Something like that.

FLATOW: Yeah. Yeah.

Ms. DOUGHER: So that brings you up to $1.67 is just the price of the crude. And...

FLATOW: Now you work for the American Petroleum Institute.

Ms. DOUGHER: Sure.

FLATOW: Are you ever going to include, like, biofuels in the petroleum institute, like biodiesel or anything of those kinds of alternative energies that...

Ms. DOUGHER: Well, the industry already makes...

FLATOW: ...you could consider petroleum...

Ms. DOUGHER: Sure. They are already working, you know, on blending ethanol...

FLATOW: Right.

Ms. DOUGHER: ...that's made out of corn and a lot of--and different alternative fuels, too. So that's already integrated into the industry. It's mandated by Congress. But they've been using ethanol around the country, in California and New York now for a couple of years. And it'll be coming on in a much bigger fashion over the next few years as we get out of other additives and start using more ethanol. And biodiesel, all of these fuels, some of these alternatives have become, you know, an option. They are heavily subsidized, you know, by federal tax incentive. And that's what makes them somewhat viable. But we are using them in our fuels today. About, oh, I'd say, how many? Five million barrels a day--I mean, a year--are ethanol. So we do use some ethanol and we will be using more. And I don't know about the biodiesel, how long that would take to...

FLATOW: Yeah.

Ms. DOUGHER: ...get into the marketplace. But it's there.

FLATOW: Yeah. I'm waiting for it to buy my diesel.

Ms. DOUGHER: Are you?

FLATOW: Oh, yeah. I'm getting 40 miles a gallon, you know, so...

Ms. DOUGHER: Are you? Great.

FLATOW: So--I drove round trip to Washington from New York on 25 bucks.

Ms. DOUGHER: Oh, see?

FLATOW: 1 (800) 9--a week ago. 1 (800) 989-8255 is our number. We're talking about the energy crisis as part of the hurricane this hour on TALK OF THE NATION/SCIENCE FRIDAY from NPR News.

Let's go to the phones, to Don in Howell, Michigan. Hi, Don.

DON (Caller): Hi. How you doing?

FLATOW: Hi there.

DON: I was just wondering--I'm getting rather confused because I was watching a fair and balanced news report yesterday, and when Bush released some oil from the national oil reserves, they said this was more of a calming effect, that they really didn't need the oil. What the problem was was a lack of refinery capability. Now with seven of them down in the Gulf Coast, and they said it would reduce our flow by 10 percent, I guess my main question is when was the last refinery built in this country and why are they always operating at full capacity. Why don't we have some that are, like, on standby in case of emergency? This just doesn't make sense to me. It's almost like it's manufactured.

Ms. DOUGHER: OK. Why don't I start with the SPR first, releasing of that. There are 12 refineries in the Midwest now operating at reduced run because they can't get the crude from the Gulf of Mexico. So those refineries will be able to borrow the crude from the Strategic Petroleum Reserve. Five refineries during Ivan last year did the same thing and then they pay it back, the amount that they borrow. So this will help the marketplace because it'll help the refineries in the Midwest get up and running faster than they would've otherwise.

And then in terms of the refineries in the United States, it's true we haven't built a new refinery since about 1976, but I think one of the points that gets lost sometimes is that over this period of time, we are producing record amounts, more than we've ever produced. We produce about 90 percent of the gasoline we consume. And each year, we continue to produce about 90 percent and we import about 10 percent, most of it in the Northeast, New York and the New England states. But having said that, we have a system that is maxed out. It's 97 percent capacity. It's running day and night. And this storm has been a big hit to that.

And the reasons that it hasn't expanded faster are both economic and they're also political. The return on the investment in the refining sector has been very poor compared to other sectors of the industry for a long time now. But also it's been hard to build on the existing capacity or even build a new refinery. There's one new refinery trying to get up and running in Arizona for a long time now. They have spent 10 years trying to get permits to go through just the paperwork alone. Most areas don't want refineries in their back yard. And just this summer, the government suggested that maybe some of these closed military bases could be used for siting new refineries. And I think that that may be a really good option to explore, both with the communities and also with the oil industry. So that is what's going on in the refining sector.

DON: I just don't understand that--I mean, this is basically--not basically, it really is--a matter of national security as far as economics and security. If some of those refineries were to be bombed or taken--I mean, I remember last summer, I think it was last year that we had a fire here in the Midwest in one of the refineries. And all of a sudden here in Detroit the prices went up by 15 cents a gallon just because one refinery went down. This...

Ms. DOUGHER: You're absolutely right...

DON: ...is ridiculous in a country this size.

Ms. DOUGHER: We, the industry, agrees with you fully and really has been very active with Congress and trying to move legislation through to help facilitate the expansion of refineries in the United States. We recognize that we are a system stretched really, really thin. And all it takes now, as you said, one refinery going down and it's enough to send the prices skyrocketing. And that's--you know, because of that thin line--if we had more capacity and more we could bring on, you wouldn't see that kind of volatility. We see that in the crude marketplace, too, same thing. We do have a lot of resources here that are off-limits. And that's one of the reasons a lot of our industries concentrate in the Gulf of Mexico because that region welcomes the industry there. But there are a lot of resources in other areas around our nation that have been placed off-limits and they would be economic to explore.

FLATOW: All right. Ray, I want to thank you very much. I'm still asking the same questions I did 30 years ago.

Ms. DOUGHER: It never changes.

FLATOW: Getting the same answers. So I want to thank you for being consistent with me.

Ms. DOUGHER: I'm sticking to my story.

FLATOW: There you go. Ray Dougher is manager of energy market issues at the American Petroleum Institute in Washington. Thank you for taking time to talk with us.

Ms. DOUGHER: Thank you. Bye-bye.

FLATOW: You're--have a good weekend.

(Credits)

FLATOW: If you have comments or questions, you can surf over to our Web site at sciencefriday.com. Also, Kids' Connection is about to gear up for the upcoming school season. We've got some back editions of SCIENCE FRIDAY. You get on Kids' Connection. Free teaching materials. Click on the teachers button. Also, you can listen to our podcasts of SCIENCE FRIDAY. Just look for the podcast, click right there on the Web page, and you can download podcasts from many, many editions of SCIENCE FRIDAY.

I'm Ira Flatow in New York.

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