Hurricanes briefly boost diesel prices and freight rates

By James Haughey, Director of Economics, RBI -- Logistics Management, 10/4/2005

WALTHAM, Mass.—There are currently two separate oil supply problems causing record high diesel prices and the accompanying surge in freight rates.

The first is the surge in world oil demand that began two years ago, raising diesel prices from $1.50 to $2.60 by late August. The second is the temporary loss of Gulf of Mexico-based crude oil, refining, and distribution capacity that instantly boosted diesel prices to $2.85. The second problem will pass over the course of the next month, but that will still leave us with the problem of surging demand—and that demand will linger for months due to how we coped with the temporary supply loss.

The twin Gulf hurricanes caused the loss of .0014% of the world’s total annual oil supply by the end of September with the final total loss likely to be less than .004% (four tenths of one percent). Temporary refining and distribution losses were measurably higher. Keep that small fraction in mind when you consider post-hurricane operations changes.

However, even this small supply loss caused national diesel prices to jump almost $0.50/gal., with even higher prices and spot shortages in some regions. Pump prices jumped abruptly because refined product exports from both New Orleans and Houston were each almost entirely lost for a week. Damage to refineries, ports, oil terminals, pipelines and reserve storage tanks prevented immediate access to alternative supplies. The consequence was a flurry of diesel price premiums added to freight rates—as a matter of fact, shippers have yet to feel all of the rate increases that are coming.

Most of the September and October oil and refined products supply loss is being covered by drawing on inventories and emergency supplies—reduced consumption also covers a sizable part of the loss. While this holds down diesel prices in September and October, the flip side of the coin is that we have to replace the inventories in an extremely tight market environment so that a minimum reserve is available for a cold winter or an active hurricane season in 2006.

This will keep diesel prices in the $2.50-$2.70 range into the winter moths. The hurricanes caused a several month postponement in the expected drop in crude oil prices from $65/bbl. to a more sustainable price in the high $40s.