Gasoline Prices Spike on Ike

Wholesale prices—those paid by gas retailers—jump to almost $5 a gallon on the Gulf Coast. But it's unclear if they'll stay high

by Christopher Palmeri

Just when you thought it was safe to fill up your tank…

Gasoline prices are spiking on the U.S. Gulf Coast as Hurricane Ike nears shore. The Oil Price Information Service (OPIS), a market research firm, reported on Sept. 11 that gasoline trading on the Gulf Coast is "absolutely frantic," with wholesale prices nearing $5 a gallon. That's twice what gasoline futures were trading for on the New York Mercantile Exchange.

The frantic trading is occurring in the wholesale market, which consists of everyone from large refiners to local distributors. Whether the high prices stick and spread to gasoline stations nationwide will likely depend on how much damage Hurricane Ike causes. OPIS reports that suppliers are raising prices in record time and concludes that the industry should expect to see a "myriad of supply issues, and wild swings in prices."

Bill Day, a spokesperson for Valero Energy (VLO), the nation's largest refiner, says the company is shutting down operations at two of its largest facilities, in Houston and Texas City, Tex. A third, in Port Arthur, Tex., was likely to be shut down the afternoon of Sept. 11. Day said that prior to the storm, the company's refineries had been running flat out, in anticipation of disruptions. Still, Day said, "the path that Ike is taking takes it into the heart of the Gulf Coast refining industry. There definitely will be an impact on supply."

On Sept. 12, the energy information service Platts.com reported that gasoline prices in the wholesale market had risen to $2.15 over the Nymex price. "Any normal [price] is out the window," says John Kingston, the director of oil information at Platts, which, like BusinessWeek, is owned by The McGraw-Hill Companies. Part of the problem with the Gulf Coast market, he said, is that "not a lot of people are around to trade."

The gasoline price information site GasBuddy.com is already showing the impact of hurricane-pricing in local markets. Nationally, gasoline on Sept. 12 was up just 3¢ from the day before, to $3.70 a gallon. In some cities dependent on Gulf Coast supplies, though, price increases were much higher. In Memphis pump prices were up an average of 5¢; Atlanta, 7¢; and Charlotte, 10¢. "I'm expecting up to 50 cents-a-gallon increases in New York, 75 cents in Chicago and up to $2 in Houston, says Peter Buetel, an analyst with the energy risk management firm Cameron Hanover Associates. "We'll see in the next 72 hours. Hopefully if we don't get any long term damage prices will be back down in the next ten days."

At some stations, pump prices will jump immediately, in other cases it could take a couple of days, said Platts' Kingston. "There are some retailers who are going to take a real bath if they try to capture all the increase right away," he said.

The U.S. Department of Energy is releasing oil from the Strategic Petroleum Reserve to supply two refineries, and is considering a request from a third. The Environmental Protection Agency is temporarily waiving fuel Clean Air Act requirements in nine states, so that refiners can deliver as much gas as possible to those markets. Platts reports that nearly a third of Shell stations in Houston have run out of gas as local residents stocked up in anticipation of an evacuation.

Oil Employees Told: Go Home

The Gulf Coast produces more than 7 million barrels of refined products per day, about 42% of the nation's total refining capacity, according to the U.S. Energy Information Administration (EIA).

A "storm center" page on the Web site for ConocoPhillips (COP), the nation's second-largest refiner, reports that the company's Sweeny (Tex.) refinery is being shut down. Its Lake Charles (La.) plant is operating at reduced rates and its Seaway refined product pipeline is closed. Houston-area employees were told to leave work at noon on Sept. 11.

The country is entering the fourth month of hurricane season with tight supplies of oil and gasoline. At 298 million barrels, national crude-oil supplies are down 7% from this period last year, according to data released Sept. 10 by the EIA. The U.S. Minerals Management Service reports that 1.25 million barrels per day of oil production—95% of the output on federal waters in the Gulf—is still shut down due to precautionary steps taken by oil companies in advance of Hurricane Gustav last week.

Weak Global Energy Demand

Nevertheless, oil prices have been falling. Crude prices are presently hovering at $100 a barrel, down $15 from late August. Shares of most of the major oil companies were trading down on Sept. 11.

That's because energy demand has been surprisingly weak. The EIA reported on Sept. 10 that U.S. gasoline consumption fell 4.4% in June, the largest year-over-year drop since 1980. High prices, a sluggish economy, and a summer of "staycations" is cutting into oil demand worldwide. For the first half of 2008, U.S. oil demand was down 4.5%, or 925,000 barrels per day. Oil consumption in 29 other mature markets—including Britain, Italy, and France—was flat. On Sept. 10, the International Energy Agency, a closely watched forecaster, cut its world oil-demand projections for this year and next.

In 2005, Hurricane Katrina knocked out four Gulf Coast refineries for more than half a year. Gasoline prices spiked, prompting a few fines by state regulators for price gouging. The oil industry worked overtime—restoring facilities and importing foreign gasoline—to bring gas prices down. The larger impact of Katrina was to inspire a national debate about energy policy that continues into this year's Presidential election.

Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau.