Amid threat to supply, gas prices skyrocket

`Those who own the oil are making a lot of money' with refining interrupted

Katrina's Wake

August 31, 2005|By Meredith Cohn | Meredith Cohn,SUN STAFF

Residents of states that have not seen a drop of rain from Hurricane Katrina might be wondering why a storm in New Orleans yesterday means higher gas prices for them today - and predictions of bigger jumps soon.

It's especially confounding because the nation imports two-thirds of its oil. Moreover, even a barrel from the United States' biggest sources in the Gulf of Mexico region heads through a long process from the drill to the pump. Just piping gasoline from refineries in Louisiana to a gas station in the Baltimore-Washington area takes about two weeks.

Experts say the answer is in that supply chain - or fear of what isn't in it.

"Everyone looks at commodity markets every day, and when they see their price is going to go up, they charge more," said Frederic H. Murphy, a professor of management science at Temple University in Philadelphia.

When there is less product, and demand stays strong, the price goes up. And there is going to be less product when a hurricane prevents supplies from getting in the system. What's different from years ago, and causing the speedy markup, is that the market is less equipped to handle such a disruption.

More than half the cost of gasoline, now averaging about $2.60 a gallon nationally, comes from the price of crude oil. When it goes up, it pushes up everyone else's costs. Crude prices are up because world demand is at an all-time high, and buyers are paying a premium. The United States is still the world's biggest user, but producers are also being taxed by growing demand from China and India.

The world now consumes about 84 million barrels of oil a day and produces about 85 million barrels a day, leaving a slim 1 million--barrel margin - a fraction of what it was just a few years ago.

The U.S. Minerals Management Service reported that Katrina knocked out eight refineries with capacity of 1.4 million barrels a day, or more than 10 percent of the nation's refining capacity.

"That's a significant number," said Ron Planting, an economist for the American Petroleum Institute, a trade group. "And no one is certain when they'll come back online. I've heard reports that at least one refinery is flooded."

When a larger cushion existed of excess oil and gasoline, there was a greater lag time for retail price increases after disruptions from storms, accidents and other events - or maybe no increase at all, he said.

There are still just under 200 million barrels of gasoline in the nation's major storage facilities and pipelines, not counting service stations. That's just under the average of 204 million barrels.

But U.S. consumers use about 9 million barrels a day, and everyone in the supply chain is trying to ensure he gets some of the dwindling inventory to sell. They scramble, bidding up the price along the way.

"That's supply and demand," Planting said, "whether it's apples or oil."

During Katrina, a barrel of oil reached just over $70. Yesterday, it settled just below $70 on the New York Mercantile Exchange. The average price nationally of a gallon of regular gas was $2.604 yesterday, up from $2.603 the day before, according to AAA, the national motor club.

That's still not a record, when adjusted for inflation. The peak was in 1981 when a barrel was about $80, and a gallon of unleaded in today's dollars was about $3. But the price is getting close.

The cost of crude oil and refining accounts for about three-quarters of the retail price of a gallon of gasoline, the U.S. Department of Energy reports. Federal and state taxes, and costs related to distribution, marketing and regional environmental requirements are on top of that. The final few cents include a markup based on what oil companies think different neighborhoods will pay and covering other retail costs, such as credit card fees.

"Those who own the oil are making a lot of money," said Murphy, the Temple professor. "But everyone is making money along the way."

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