Wednesday, September 28, 2005

The Hurricane Zone

A friend of mine and I were watching the news last week as coverage focused on hurricane Rita. The news story focused on the Galveston seawall, and how it would probably not be adequate to prevent flooding of the town, should Rita come ashore there.

This in a city famous for having been leveled in 1900 by a severe hurricane.

What is it about the Carolinas, Florida and the Gulf Coast? Living in a hurricane belt, you would think that the business owners and residents of the region would have shown more foresight regarding the potential damage from these storms when they build their facilities, homes and cities.

Take oil refineries, for example. I saw an interview with Lee Raymond of ExxonMobil on CNBC this week. He opined how until the past few weeks, he had never known how many experts on oil refineries there were in the US. That’s a pretty funny remark, until you let it sink in a bit.

You don’t have to be an expert at building or operating an oil refinery to realize that concentrating so much evidently unprotected, vulnerable capacity in a hurricane zone seems like inept business planning. The oil industry executives bemoan over-zealous environmental regulations, but the net effect of their decisions on refining capacity and locations over the years is to be unable to keep pace with the growth of their customers’ demands for refined petroleum products.

It’s easy to get lost in the thickets of how hard it is to build new refineries, pipelines, etc, thanks to various regulatory barriers. But from my perspective, it seems that the energy sector’s major mistake has simply been to underestimate demand, leaving them with barely adequate capacity at present, before the hurricanes affected the 25% or so of oil and gas production and refining that we are told are located in the Gulf region.

It’s not some evil conspiracy to drive up prices. Many, though not all, of these executives missed the boat on how Chinese and Indian demand would affect the global balance of supply and demand for carbon-based energy. I doubt they are happy to have unmet demand in this country right now.

As with many other business snafus, the real issue seems to be a simple deficit of capable business strategy and execution which take into account the realities of factors affecting supply and demand.

I’ll be touching on this subject again soon- how mediocrity in business management touches us all in unrealized ways.

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