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Katrina Ignites Fuel Prices

By Timothy J. Gibbons
Published by Florida Times-Union on September 12, 2005.

Gas prices were already ticking their way toward a true record this year, one that would top the charts even after adjusting for inflation.

And that was before Hurricane Katrina.

Afterwards?

"It was exactly what oil market analysts feared the most this summer," the Energy Information Administration said in its "This Week in Petroleum" review issued the week following the devastation along the Gulf Coast. "Unfortunately for many oil consumers, we will soon see what happens when a supply shock occurs when prices are already at high levels."

At first, what happened was fiercely rising costs, with the price of gas jumping several times a day, climbing higher and higher as gas stations began to drain their wells.

Now, though, it appears that the shock to the system might be what the oil market needs to send prices lower than they were pre-hurricane, although that process is likely to take months to play out.

"The fundamentals didn't exist to justify the gas prices being where they were before Katrina," Paul Mason, chairman of the Department of Economics & Geography at the University of North Florida, said toward the end of last week. "There's been an unprecedented decline in prices in the past few days."

Just as prices jumped rapidly in the wake of Katrina, they fell almost as quickly. Consumers who saw the prices at the corner gas station jump from $2.69 when Katrina was approaching land to over $3 after it hit came into work after Labor Day to see it a dime or so below that high. By Friday, a gallon of regular was selling at a national average of $3.018, while in Jacksonville it went for $2.95.

That drop was the first major decline this year.

Oil prices have been rising for months, with gasoline prices rising in concert: By Aug. 29, when Katrina arrived, the national average price of a gallon of gas had jumped around 75 cents from a year ago, landing at $2.61. (Florida's average was a penny more.)

The devastation visited upon New Orleans and the surrounding area by Katrina only exacerbated matters. As the hurricane swept to shore, it damaged production facilities such as oil rigs in the Gulf of Mexico, refineries in Louisiana and Mississippi and area pipeline systems that carried gasoline across the nation.

By Sept. 5, the national average was $3.069, up $1.219 from a year ago and about 46 cents from the week before.

Prices haven't hit levels like this since 1981, when the annual average was the highest ever, at $2.951 after adjusting for inflation. Prices peaked in March of that year, when the national average for a gallon of regular was an inflation-adjusted $3.118.

Katrina's strike was the sort of disruption that the petroleum business, already roiled by increasing demand and extremely tight supply, just didn't need.

For those who supply gasoline to fleets and gas stations across the country, the chokehold at America's major entry point for fuel made getting that fuel and delivering it to customers a difficult proposition. The Gulf Coast produces almost a third of all the oil pumped in the United States, and refines almost half of the gasoline manufactured here.

"It was a very tight market before the storm," said Jay Wilson, a spokesman for Amerada Hess, which brings gasoline into Jacksonville for dissemination throughout the region. "The demand for gasoline has been outpacing supply. When Katrina occurred, it impacted the Gulf Coast and took offline a significant amount of U.S. refining capacity."

Jacksonville had it a bit easier than some other parts of the country, since a range of companies, including Hess, BP/Amoco, Chevron and others are able to bring fuel in over the water from refineries elsewhere in the United States and in other countries. Inland areas, which are typically served by pipelines transporting the gas from ports, had to deal with limited supplies when Gulf Coast pipelines shut down.

"We had to handle quite a bit of logistics to bring things inland," Wilson said, pointing to Charlotte, N.C., as an example. Although that city is usually supplied by pipeline, during the early part of last week, gasoline had to be brought by barge into the Port of Charleston and than trucked to gas stations.

And that was when gas was to be had.

Before the hurricane, Gulf Coast refineries cranked out about 8 million barrels a day. The storm crippled most of those facilities, although some of that capacity was creeping back online in the latter part of the week, as crews were able to make repairs to about eight of the 20 damaged refineries, including two of the largest in the area.

Although no one is sure when the others will return to service -- with the head of the U.S. Energy Information Administration telling Congress last week that at least four of them will be out of commission for "a matter of months" -- at least half of the refining capacity is expected to be operating this week. In its short-term energy outlook report issued Wednesday, the administration said that no more than 1.2 million barrels per day of refining capacity should still be offline at the end of September.

Even if it's only for the short term, the loss of the coastal refineries is particularly painful because there's not many of them in the United States. Even if the supply of oil was abundant, refineries can only turn it into gas at a fixed pace.

"Everybody that has a refinery that's operating is running it as fast as they can," Wilson said. "It's going to be critical to get that refining capacity back online."

According to the National Petrochemicals and Refiners Association, the country has 149 refineries, with the newest one being built in the 1970s. Building a new refinery is a massively expensive and lengthy project, and -- perhaps more importantly -- a project that no one seems to want to see being worked on in their backyard: Proposed refineries in Maine and California have been shot down in the past year by protesting residents, and in-land refineries are less attractive because they sit too far away from the ports where crude oil is imported.

Still, as the Gulf Coast refineries come back to life and summer driving trips come to an end, it's likely that prices will at least return to the levels we grew accustomed to earlier this year, said Gregg Laskoski, a spokesman for AAA Auto Club South in Tampa.

"We are still somewhat optimistic that we will see a price plateau," he said.

The high prices caused by Katrina might even help drive prices down, said Mason, the UNF economist who studies oil prices: Much of the recent rise in oil prices came from speculators bidding in futures markets, hoping to "buy high and sell higher," he said. Such speculators seemed to have become more bearish as the oil industry leaped to get refineries back online, which could allow the cost of oil to drop to a more natural level.

One other bright light pointed out by Laskoski is the higher prices might have the supply-and-demand effect predicted in an Economics 101 textbook: Facing a $60-plus bill for filling up the family SUV, some drivers might opt to drive less, reducing demand and allowing the price to edge downward.

"The only thing that would make availability an issue again is any type of disruptions in the delivery of fuel," Laskoski said, and then paused. "Of course, we still have a few months left of hurricane season."



About

This is a showcase of the work done by Timothy J. Gibbons during a journalism career now stretching back more than a decade.

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