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Gustav may hike gas before Labor Day weekend

The brief respite for consumers at the gasoline pump may come to an abrupt end if Tropical Storm Gustav slams into the petroleum-rich Gulf Coast and its numerous refineries, just as Americans begin packing up cars for the Labor Day weekend.
/ Source: The Associated Press

The brief respite for consumers at the gasoline pump may come to an abrupt end if Tropical Storm Gustav slams into the petroleum-rich Gulf Coast and its numerous refineries, just as Americans begin packing up cars for the Labor Day weekend.

Gustav was downgraded from a hurricane to a tropical storm Wednesday after moving over Haiti, but forecasters expect it to regain strength and move into the Gulf of Mexico in a few days.

Oil companies with operations in the Gulf began removing nonessential workers from rigs, platforms and other facilities Wednesday morning, and refiners were preparing too.

There have been some minor production cuts, but so far, output has largely been unaffected.

Still, oil prices spiked more than $2 to above $118 a barrel, rising for a third day as Gustav spun toward the Gulf. Its approach is just days before the three-year anniversary of Hurricane Katrina, which along with Hurricane Rita devastated the region's energy infrastructure.

The U.S. Gulf Coast is home to nearly half the nation's refining capacity, while offshore the Gulf accounts for about 25 percent of domestic oil production and 15 percent of natural gas output.

Even a perceived threat to that infrastructure roils the energy markets.

Kenneth Medlock, an energy expert and adjunct economics professor at Rice University, said a run-up in gasoline prices as a storm approaches is not uncommon, prompted in part by fears of potential supply shortages in the storm's wake.

"Station owners have to value what's in their tanks based on what the replacement costs are — what's it going to cost them to buy off the rack, basically," Medlock said. "So when that price goes up, they're going to start raising the price at the pump, although it's usually a short-term thing."

Any refinery shutdowns to hike prices
Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates, said any refinery shutdowns would likely lead to a spike in retail gas prices.

Those prices have dropped for seven straight weeks and, at a national average of $3.686 per gallon, gasoline hasn't been this cheap in four months.

Even before a potential strike, Gustav may give Americans a jolt as they get ready for Labor Day weekend.

"There's a strong chance that by Friday we could see some fairly significant pump price increases," Ritterbusch said. "Crude can be replaced and brought in via tanker, but bringing a damaged refinery back up again can take a long time, as we saw with Katrina and Rita."

Business weather research firm Planalytics said Wednesday up to 80 percent of the Gulf's oil and gas production could be shutdown as a precaution if Gustav enters the region as a major storm.

Ben Brockwell, director of data, pricing and information services for the Oil Price Information Service in Wall, N.J., said a jump in prices is not unexpected as Gustav approaches, but he doesn't foresee a long-term spike unless the storm causes major damage.

Brockwell said the oil industry learned valuable lessons from Katrina and Rita and has made changes that should expedite its recovery after the next big blow.

‘With Gustav, we’re watching day by day’
Companies have spent hundreds of million dollars in the past few years to improve their operations. Platform moorings are stronger, pipelines are deeper, backup power is in greater supply.

For refiners, the two biggest challenges after Katrina and Rita passed were power disruptions and flooding. As such, some refiners have raised critical equipment above flood levels and enhanced plans to get backup power as quickly as possible.

"Katrina was an event that changed how the oil market reacts and responds to hurricane threats," Brockwell said.

Oil companies have strict protocols for removing workers from the Gulf, and they'd kicked those plans into high gear Wednesday.

Royal Dutch Shell PLC said it expected to evacuate 300 nonessential personnel Wednesday, and other producers, like BP PLC, were doing the same.

Transocean Inc., the world's largest offshore drilling contractor, said all 11 of its offshore drilling rigs in the Gulf were pulling up and securing drill pipe and other subsea equipment as a precaution. The company had evacuated 30 of its 1,550 workers in the Gulf as of Wednesday morning, with more expected to leave in the next few days.

Bill Day, spokesman for Valero Energy Corp., North America's largest refiner, said decisions on production would be made when more was known about the storm's severity and direction.

"With Gustav, we're watching day by day, hour by hour even," Day said.