Storm tightens U.S. oil supply

Many experts forecast higher prices after Gulf rigs, refineries shut down

Energy Costs

Hurricane Katrina

August 30, 2005|By Paul Adams | Paul Adams,SUN STAFF

The record high gasoline prices reached just a week ago in Maryland and much of the nation might seem like a bargain compared with what many experts say could occur at the pump once the effects of Hurricane Katrina are felt in the coming days.

The powerful storm forced the evacuation of oil rigs and the shuttering of refineries along the Gulf of Mexico, sending natural gas, oil and gasoline prices higher yesterday amid fears that production in one of the nation's most important oil regions could be curtailed for days or weeks.

Federal officials said eight refineries with capacity of 1.4 million barrels of oil per day - about 11 percent of the refining capacity in the United States - were shut down just before the busy Labor Day travel weekend. Depending on how much damage is done, gas prices that hit a record $2.67 per gallon for regular unleaded in Maryland and $2.61 nationally Aug. 22 could climb to $2.75 or more by the weekend, analysts said.

"If you're in a big city, you'll see it [today]," James Williams, an economist with WTRG Economics in London, Ark., said yesterday. "It depends on how often the retailer near you fills his tanks and what the guy across the street does."

Supply and demand

The Bush administration said it is considering whether to release oil from the nation's emergency stockpile if refiners request the move to help alleviate supply disruptions.

The expected price spikes come as most economists say that higher energy prices are taking a heavy toll on the economy, sending prices for some goods higher when wages have been flat for many Americans. Many economists predicted this year that the economy would see significant damage if crude prices hit $60 per barrel. That estimate was later upped to $70 a barrel, a milestone reached briefly in trading yesterday.

The federal Minerals Management Service said 92 percent of the Gulf Coast's oil output and 83 percent of natural gas output were taken off-line because of the storm. Even if little damage is reported, it will take time for production to ramp up again, analysts said. One analyst compared restarting a shuttered refinery to restarting a lawn mower after it has run out of gas - it needs lots of priming first.

Prices climb higher

Trading for crude oil settled at $67.20 a barrel yesterday after climbing to $70.80 in early trading. Adjusting for inflation, it would take prices of $90 per barrel to match the highs reached in the early 1980s.

Wholesale gasoline prices in the Gulf Coast market - one of the nation's biggest - soared more than 25 cents yesterday afternoon as panicked traders anxiously watched television for news of hurricane damage, said Tom Kloza of Oil Price Information Service in Wall, N.J.

Natural gas prices, which have doubled in the past year, climbed by double-digit percentages yesterday amid concern that pipelines from the ocean floor to facilities along the Gulf Coast could be damaged by wind and waves.

"This has come at the most inopportune moment," said Kloza, referring to the tight gasoline supply typical of the end of the summer driving season.

The hurricane's 145-mph winds slammed a critical link in the nation's energy supply. Louisiana is home to 17 petroleum refineries and storage facilities, and pipelines carrying everything from oil to natural gas and liquefied petroleum gas. The state has a combined crude oil distillation capacity of 2.8 million barrels per day, second only to Texas.

A fortuitous turn?

Industry officials say it will take at least until tomorrow before workers can get back to oil rigs and refineries to assess the damage. Flooding and power outages could prove as troublesome as wind damage, experts said. Initial reports suggest that the damage might be less severe than initially expected.

"The hurricane turned right," Williams said. "It's almost that simple."

Some predicted a fast comeback for oil and gasoline production if damage is minor.

"If there is no significant damage, most of these things can be up and running in a fairly short period," said Ron Planting, an economist with the American Petroleum Institute.

But if Hurricane Ivan a year ago is any indication, the damage could be long-lasting and widespread. That hurricane tangled underwater pipelines at the point where they rise from the ocean bottom and meet the muddy shallows along the coast. The damage crippled refineries and reduced crude oil production by 38 million barrels from September 2004 to January 2005, according to the American Petroleum Institute. Seven platforms and 100 underwater pipelines were damaged, and some facilities were down for months.

"Hurricane Ivan pretty much just clocked the eastern edge of the Big Oil section in the Gulf, whereas Katrina really went into the heart of the oil production side," said Doug MacIntyre, a senior oil market analyst with the U.S. Energy Information Administration in Washington.

Like a heart stopped

The hurricane forced the closing of the Louisiana Offshore Oil Port, which services the world's largest oil tankers and is the biggest oil import terminal in the country. The facility, about 20 miles offshore, handles about 11 percent of U.S. imports, feeding oil refineries thousands of miles away.

With the facility out of commission, refineries in the Midwest are scaling back production to ensure that they don't run out of oil, forcing a shutdown. Shutting down a refinery is a complicated and time-consuming process, so refiners try to avoid it.

The offshore terminal "is like a heart pumping. And the heart has stopped pumping for a couple of days at least," said Kloza. "If you get crude from that Louisiana Offshore Oil Platform and you miss even a few days, you could have a real problem."

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