Wednesday, August 31, 2005

Hurricane Katrina’s Sobering Math

Typically, car tanks are about one-quarter full. If buyers start keeping car tanks three-quarters full, the added demand would quickly drain the entire system of gasoline supplies.—Today’s WSJ

Shortly after I got my driver’s license—this is ancient history—an event occurred across the globe that severely altered world economies but made my own myopic world a little brighter.

This was the Arab Oil Embargo, which quickly triggered long lines at those gasoline stations fortunate enough to get their share of supply.

What made my own myopic world a little brighter was the fact that, being a teenager with a new driver’s license, and having the endless spare time that teenage boys seem to have, my job was to find the gas stations with the gasoline, and fill up the wagon or the sedan—whichever was running low.

That meant, ironically, lots of driving around after school, and, then, lots of time sitting in a car listening to WNEW-FM, the New York City radio station that used to play actual music based on the actual whim of the disk jockey [see previous discussions of the inevitability of satellite radio in earlier posts]—neither a bad thing from my teenage point of view.

Having a father who worked for a Big Oil Company—the target of choice for Politicians With No Good Ideas of Their Own as well as Angry Consumers Who Never Conserved in Their Lives—I understood that the problem with the Arab Oil Embargo was not so much the embargo itself, but the consumer reaction to that embargo.

Consumers, fearing a shortage, reacted by hoarding gasoline. That, in and of itself, created the shortage of gasoline that otherwise would have been no true shortage at all, as I heard night after night while my father hurled invectives at Geraldo Rivera, then a cub TV reporter, who would show film of oil tankers waiting off the New York Coast “for prices to go up.”

“They’re waiting to unload, you moron!” my father would yell at the TV. It did no good, of course—this was in the pre-blogging days, when the Mainstream Media could say pretty much whatever it wanted without being corrected.

In time, the hoarding mentality dissipated and supplies became plentiful as demand responded to higher prices by going down, and soon my temporary job disappeared, as did Geraldo’s.

Yet today’s Wall Street Journal coverage of the aftermath of Hurricane Katrina took me back to that summer, and, I think, offers a sobering analysis of the situation we face today, in light of the tragedy—both human and economic—left behind in her wake:

If the U.S. auto fleet of 220 million vehicles went up to three-quarters of a tank—or, say, 10 gallons more—it would be an additional 2.2 billion gallons of demand.

Any figure with a “billion” in it sounds large, and in comparison to available inventory of gasoline, 2.2 billion is very large...

Gasoline inventories were 195 million barrels on Aug. 19, and diesel an additional 77 million barrels, according to the latest government data, or a total of 8.19 billion gallons [of gasoline] and 3.23 billion gallons [of diesel], respectively.

Of the 8.19 billion gallons of gasoline in inventory, much of that is not available—being part of the normal stock throughout the supply chain—refinery holding tanks, pipelines, bulk plants, barges and service station tanks.

Consequently, should the American consumer decide to top off the old Hummer, the supply chain could get strained very quickly.

Let’s hope the oil industry gets those refineries back up and running quickly. I guarantee the so-called villains at Big Oil will do everything humanly possible to get it done.

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.


Sam S. Park said...


I really enjoyed this piece. I wasn't around to experience the outrageous lines at the gas stations. However, you do an awesome job of providing your readers with an image as if we were there... or with reminiscence for your experienced and senior readers. Let's hope you're right, and the supply chain issues will correct themselves quickly. I don't really want to wait in mile long lines so that I could pay over 40 bucks to fill my car.

Chris Fischer said...


Like Sam, I wasn't around in the 70's to witness this.

But I did witness it today.

I waited in like 10 minutes to get my tank filled up with premium today at $2.89/gallon (this is in Delaware.) On the road where this happened, there are 5 gas stations within 1/3 of a mile of each other. 1 Exxon, 1 Mobile (same company), 1 Shell, 1 Texaco, and 1 other no-name gas company. The premium prices at the Shell and Texaco were $3.19/gallon.

The Shell station price actually changed mid day. I left work to go teach a class, and by the time I had gone back to work, it had jumped from $2.87 to $3.19.

So everyone was lined up at the Exxon and Mobile stations to fill up. Ironic, since they are usually the 2 highest price stations on that strip.

poletown said...

People are generally stupid, and will believe anything the news tells them. This is evident by the email scam that tricked Florida drivers. You would think my now, that we all know better than to believe chain, emails, but apparantely this doesn't hold true in our friendly "hanging chad" state.

People went into a complete and utter panic swamping gasoline stations, because this false email said that supplies were almost exhausted. The government persisted to tell people it was fake, but "they just know it's true".

It's a sad testament to how our pop culture society will believe anything fed to them. Because, remember, if you saw it on the Internet, it MUST be true.

Excellent post Jeff (as always).


mastermind said...

Behavior wll change, that is for certain. Nobody can be sure the outcome. There will be winners and losers,.... but I can tell you this: It is ALL going to end very badly, culminating in a severe (re)(de)pression, no pun intended. Has anyone considered the ramifications of the new Bankruptcy Laws set to take effect? This is going to be ugly!

whydibuy said...

HAVE NO FEAR, STEVE FORBES IS HERE. 35-40.00 oil in 1 yr so sit back and relax. Its all just another big bubble generated by speculators. True, supply and demand figures do not support this level of prices. We'll see.

Chris Fischer said...


I think you're right about one thing. For our economy, between energy prices and the real estate bubble, I'm not sure how it's going to end. But whichever way it does, I think it's going to end badly. We have about 4 months before interest rates do 1 of 2 things,

1) Yield curve flattens/inverts
2) 10 Yr. rises significantly

and I see both ending in recession.

Jeff Matthews said...

More data points on the gasoline situation are welcome.

In my case, the local Texaco raised prices 30c a gallon overnight.

Furthermore, while driving along Route 44 in Rhode Island to visit some retailers, I had a similar experience to Chris Fischer: several no-name gas stations had jacked up prices above $3.00, so I started thinking of filling up at the next Mobil, just in case.

But the next Mobil station--top price $2.95--had lines out to the street.

To quote Steven Stills: there's something happening here...

Haz said...

If what the WSJ postulates is true, then if people were to fill up their tanks 1/2 way in times of supply tightening, then this should alleviate the problem, correct? That and driving/speeding less.

I find it ironic that the "fear-hoarding" mentality actually exacerbates the problem.

Nathanael James said...

In response to Jeff's encouragement of more data on gas price changes, I am writing from Edmonton, Alberta Canada. We saw a 20 cent increase PER LITRE overnight. That works out to around 70 cents a gallon, I believe. (I'm not the greatest with metric conversions). We now pay about $1.20 - $1.25 per litre. That must put us closer to $4.00 a gallon, even after correcting for the exchange rate.

Sam S. Park said...


The yield curve has flattened/humped and may invert. I wrote a report on this for RW Wentworth a few months ago. You can read it by clicking on this link.

As for gas prices, it jumped to $3.45 here in San Diego. This is not good.

whydibuy said...

OK in case you doomdayers didn't notice, the stock market rallied nicely today along with a drop in the 10 yr yield to a nearly flat 4%. It may break below 4% by the end of the week. The market says this nonsense will pass shortly.

Chris Fischer said...


You're right, it did. My concern isn't this one event, but the persistantly high fuel prices coupled with the interest rate curve.

Why it rallied is beyond me - $25 billion in damages and higher fuel costs I don't think can be a positive in anyone's book.

Time will tell. But I don't see the economic outlook in this country being very bright for the next 5 years.

decheung said...

>>Any figure with a “billion” in it sounds large,

Actually, I believe there's a well known paradox where numbers that are huge become incomprehensible to the human mind.

For example, the difference between 12 billion and 19 billion isn't nearly as great between $5 and $95.

Aaron Koral said...

Hi Jeff - I agree with a previous poster that your comment today is right on the mark. I was too young to know or understand what happened with the Arab oil embargo back in the early Seventies. Time (and a college education) got me up to speed on what happened back in the day. Once again, it is now a supply situation that is about to become untenable unless one of two things happen: A) people conserve their use of energy/gasoline OR B) politicans come up with solutions via the tax code to allow more refineries to be built in this country.

BTW, here in Mt. Prospect IL., a gallon of unleaded is running at about $3.09 at the Citgo station I frequent - I guess that's cheap by some standards...again, keep up the good work!

Sam S. Park said...

I'm guessing that today's rise in the market was due to today's preliminary Q2 GDP report, which comes revised a month after the advanced GDP report. GDP was revised to 3.3%. Corporate profits rose 6.1%, final sales figure was also strong at 5.4%, and we finally had positive net exports of $34 bil.

I've done some studies on economic variables that impact the markets... GDP is very significant. And like Chris suggested, the economic outlook is what we should really be concerned about. Suppose time will tell.

Or maybe it’s the fed fund futures prices rising, indicating that the Fed won’t be as aggressive. Or perhaps it was Bush’s announcement that he’s going to tap the strategic petroleum reserve. These are all just some random thoughts for now…

Going back to gas prices, I’ve asked some other people in SD about gas prices... and they average about $2.95ish for regular.

tahoe kid said...

Paid $3.38/gal. for premium in Carlsbad, CA (Northern San Diego County)yesterday, but the station had a killer view of the Pacific Ocean.

BlackLab said...


"At a Gulf station in Glassboro, Marybeth Thomas said she bought a tank of regular-grade gasoline yesterday morning for $2.81 a gallon. At noon, the station was charging $2.91, and by 2 p.m. the price had gone to $2.99. Similarly, a Sunoco station on Route 38 in Pennsauken raised its price for regular three times yesterday - ending at $3.00 a gallon.

New Jersey law prohibits more than one price change in a 24-hour period.

Area motorists also saw significant variations in prices from one station to the next, depending on when a station received its latest delivery."

Just in time for Labor Day, thank you very much.

Sam S. Park said...

Gas prices for regular unleaded in San Diego has surpassed the $3 mark. Even though California does not get its oil from the Gulf area, Californians will share the pain. However, this isn't nearly as bad as those in Florida and Georgia area who are paying TWICE what most of us are paying. I suppose the Big Oil companies will spread its costs all throughout the US.

Transporting goods continue to remain costly, and those costs will likely pass through to the consumer. Inflation is knocking on the door. I'm not sure how much impact Katrina will have on our economy, but it will definitely slow our economy. Here's a doomsday prediction that I wouldn't like to see. If our economy halts its growth and prices continue to rise, we may enter stagflationary conditions. Greenspan has some tough decisions ahead. September fed fund rate prices jumped to 96.43, suggesting now that a September hike is less than 80%. Whether or not the Fed decides to raise rates in September, making moves (in either direction) beyond that may harm the economy.

whydibuy said...

Thank God for higher gas prices. Its finally causing a reduction in the utter clogging of the roadways by bored, retired folks who drive 25 miles just to go to lunch at a different spot. Or drive 31 miles just to browse in some different mall. My friend who runs a local delivery service says yeah, it'll cost more but now I'm getting around a whole lot faster without all the dead wood wandering the streets because gas was so cheap.

Sam S. Park said...


That's the spirit... at least you can see some goods from the bad.

bpl1000 said...


ditto that!

And hopefully, they will create more bicycling lanes.

Chris Fischer said...

I agree! The schuykill in Philadelphia has been extremely fast all week. I'd happily pay $4/gallon for gas if I don't have to sit in traffic. And I have a 100+ mile roundtrip commute.

Sam S. Park said...

Chris... buddy,

I feel sorry that you have to drive so much in these environments. 100 plus miles seem excessive. Let's think of it this way... how much more (in actual dollars) per week do you have to fork up for gas?

Generally speaking, I have to give up about 10 bucks or a so. Well compute that into our disposable income, and then we'd have our impact on the economy in aggregate. It won't be too bad if we cut back on some minor things. I'd say short those minor things and go long on things that will be needed to rebuild from this devastation.

Barry Ritholtz said...

I learned the lesson in high school never to let my gas tank get below half full -- it created a large, moisture filled void in the gas tank. This was problematic for carbureted cars (less so for fuel injection), in that water would condense from the air in that half empty tank and mix with gas, fouling everyrthing from the plugs to the fuel line (in winter, the danger was that the water in a car's fuel line would freeze).

In high school, I was driving a 12 year old, 1967 Chrylser 300 with an enormous tank and alot of torque.

Anyway, keeping tank full has always been a good idea.

DaleW said...

According to 2004 NIPA accounts, average household spending on gasoline was $2,095 last year. Average oil prices are up 30% this year vs. 33% last year, so take that household number up to $2,725 before adjusting for substitution or conservation. The "tax" from higher oil prices just for driving purposes was $520 in 2004 and right now is running at $630 for 2005. 110M households = $69B hit = 55 bp of nominal GDP.

Gray said...

Just gotta respond to ..." clogging of the roadways by bored, retired folks". Thats negative, divisive AND off base.
I get to use the hov lane because I rarely drive alone. (No snide comments, I am not impared or retired) My point is that hov lanes are usually lighter because 3x as many people drive only 1 person in a car to work. Look at our habits for conservation. Make suv's and hummers park at the far end of the mall parking lot! It isn't about the dollars, its about gratitous waste of finite resources.

Sam S. Park said...
This comment has been removed by a blog administrator.
Vince said...

Think about how many cars were left in New Orleans, and even if only an average of 1/4 full, that's a lot of gas that's in that flood water.