Gas prices spurt as Gulf's rigs, refineries brace for hurricane Isaac

Just before millions of Americans get ready to hit the road for a Labor Day getaway, the price of gasoline is on the rise. Blame hurricane Isaac.

In advance of the storm hitting the New Orleans area, about half of the refineries in the storm's path had shut down for safety reasons. With the Category 1 hurricane starting to slow down and gather strength Monday afternoon before coming ashore, concerns are rising about the potential for flooding and electricity outages. Pipelines that send crude oil north to Chicago and gasoline east to Atlanta and the East Coast could also be shut down. And, it will take days to know whether offshore oil rigs, which have also been shut down ahead of Isaac, sustain damage. 

On Monday, the price of gasoline on the futures market ran up 28 cents a gallon. On Tuesday, it backed off about 4 cents a gallon, but if it doesn’t come down a lot more, consumers will start to pay much more when they go to fill up the family sedan.

At the pump, gas prices are up about 4 cents a gallon to $3.76 from a week ago, up 27 cents a gallon from a month ago, and up 15 cents a gallon from a year ago, according to AAA.

Seem like déjà vu?

After hurricane Katrina wreaked havoc in New Orleans and the Gulf Coast region in August 2005, the price of gasoline spiked by 40 cents a gallon – from $2.65 a gallon to $3.04 in a week.

Energy analysts say it’s too early to make similar predictions. Isaac is a less powerful a storm than Katrina. In addition, the oil industry learned a lot from 2005 and, presumably, will get refineries back up and running more quickly.

In a best-case scenario, refineries in the Gulf region remain shut for a couple of days. “That will push up gasoline prices,” agrees Sander Cohan, a principal at Energy Security Analysis Inc. (ESAI) in Wakefield, Mass. “But it’s not as bad as it could have been.”

That’s because gasoline inventories are plentiful, and after Labor Day demand for gasoline starts to diminish, he says. “It really depends on how many refineries shut down,” he says.

As of midday Tuesday, refiners had shut down plants with the capacity to produce at least 1.3 million barrels of oil per day. The Louisiana Gulf Coast area produces about 3.2 million barrels of oil per day, or about 18 percent of the nation’s gasoline.

How long everything stays shuttered will depend on Isaac. If the hurricane hangs around the New Orleans area, it could dump 15 to 18 inches of water on the region.

“That is the real danger – massive flooding,” says John Felmy, chief economist at the American Petroleum Institute (API) in Washington. “If there is flooding, that is a whole different kettle of fish – you have to get the water out, dry everything out, check the equipment to make sure there is no water damage, and get power back up and running.”

Government officials have already said they expect widespread power outages as a result of the storm. “You can’t do much without the power grid up,” says Mr. Felmy. “If the power outages last a week, this could be trouble because a week's worth of supply of gasoline is substantial.”

Without electricity, many pipelines will also be idle, because they need pumps to make fluids flow. “It will be a challenge without power,” says Felmy.

Mr. Cohan worries that the refinery shutdown will land even harder on the diesel market. “There is still strong export demand,” he says, which could drive prices even higher if the refineries are shut for an extended time. Last week, the price of diesel rose 6.3 cents a gallon, according to the Energy Information Administration. That was the highest level since mid-April.

However, the damage from Isaac might not be that bad – and Felmy says the industry learned a lot from hurricane Katrina. For example, in 2005 as the industry tried to reactivate refineries post-Katrina, it moved huge generators only to have them confiscated by the police to supply power to area hospitals. “We think we’ve worked through this with the emergency response people,” says Felmy.

The API economist says the industry has also toughened offshore oil rigs in the Gulf, which supply about 25 percent of the nation’s oil and 8 percent of the natural gas. After Katrina, some oil rigs suffered so much damage it took a year to get oil flowing again.

“They had never experienced or understood the huge [storm] surges,” says Felmy, “so the rigs were designed with lesser clearance. I think the platforms are in better shape.”

If the oil rigs are damaged, President Obama might have to open the Strategic Petroleum Reserve, which President Bush decided to tap after Katrina. Some traders had expected that Mr. Obama might mention the SPR in his Tuesday announcement that he had already declared a federal natural disaster for Louisiana. He did not.

Various organizations are weighing in about whether to open the SPR. AAA says it’s too early to make any announcements. “The Reserve is designed to be a tool to protect American motorists from emergency disruptions to supply and distribution, not as a response to high prices due to non-emergency supply and demand market fundamentals,” writes Avery Ash, AAA’s manager of regulatory affairs, in an analysis on Monday.  

On Tuesday on CNBC, Sen. David Vitter (R) of Louisiana warned that the SPR should not be used for political purposes.

Felmy says the SPR should be used if individual members of the API have difficulty getting crude supplies.

Despite the higher gas prices, motorists should have no trouble getting gasoline for the Labor Day weekend. AAA says it expects some 33 million Americans to travel 50 miles or more this coming weekend. That would be a 2.9 percent increase from last year. when 32.1 million people hit the road.

Even though Isaac is expected to deliver a lot of rain to the US midsection over the Labor Day holiday, Ash says nationally it won’t affect people's travel plans. “Most people are traveling to visit family and catch flights,” he says. “There might be an effect on a regional basis, but not nationally.”