Jamal Abu-Rashed, chair of the Department of Economics and Human Resources and an expert on gasoline prices, discusses the current phenomenon of rising gas prices amid the disaster wrought by Hurricane Katrina in the Gulf Coast states.
Q. What are the main factors contributing to this sudden rise in gas prices? Can it really be primarily blamed on the hurricane damage? A. The Gulf of Mexico normally produces 1.5 million barrels of crude oil a day, or about a quarter of the U.S. domestic output. Furthermore, 40 percent of the nation’s refinery capacity is located in the area impacted by the hurricane. Therefore, the hurricane coupled with power outages that shut down major pipelines that pump gas to key terminals and distribution centers along the Eastern U.S. has caused a temporary supply shock to the U.S. economy. This may put pressure on the general price level to rise and may cause a sizable reduction in consumers’ spending.
Q. Why were oil prices soaring before the hurricane, and what was (is) your prediction for their future? Will they ever come down? A. Oil prices were soaring before the hurricane (the worst hurricane on record) because of the continued fears of political instability in the Middle East (60 percent of world oil reserve), the nuclear standoff with Iran, strong energy demand worldwide, especially from India and China, and refining problems in the U.S. However, the hurricane really just exacerbated an existing situation.
In real terms of prices adjusted for inflation, prices are above those during the oil crisis in 1974, but crude is still well below the $90-a-barrel average seen in the year after the 1979 Iranian revolution. The U.S. economy is more fuel-efficient today than 20 years ago. Even if oil prices do stay higher for awhile, that does not necessarily imply recession; this should cushion the shock of higher prices.
Q. What should the country do long-term to solve the energy crisis in the area of developing new sources of energy or fuel so we don’t end up in the same situation again?
The disaster is already putting upward pressure on oil prices at a time of strong demand, tight supply and refining bottlenecks. Economic forecasters have been busy revising their forecasts to account for the charge that Katrina may yet take on the nation’s economy. The ports in the affected areas move a large portion of America’s imports—including oil and gas supplies—as well as nearly half its grain exports, and almost half of the gasoline produced in the country comes from refineries in the states along the Gulf Coast. Policy makers will have to examine and deal with the U.S.’ tight refining capacity, our dependence on offshore drilling, and deal with supply disruptions due to instability in the Middle East.