Gas Prices Edge Higher as Isaac Nears

Dated: August 28 2012

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Tropical Storm Isaac is likely to have only a slight impact on gas prices initially as Gulf of Mexico oil rigs are evacuated as a precautionary measure ahead of the storm. But pump prices could surge sharply if the storm triggers flooding or power outages that shut down oil refineries after it makes landfall this week.

Oil companies with Gulf platforms, including BP, Shell and Chevron, said Sunday they would evacuate in the face of the threat from Isaac. Offshore oil production in the Gulf accounts for about 23 percent of U.S. crude production, and refining activity along the Gulf coast accounts for about 45 percent of the nation's refining, according to Matthew Lewis, economics professor at Ohio State University

Gas prices jumped about 2.5 percent on futures markets Monday, although crude oil prices fell.

"Theoretically, you’ll get a small increase in crude prices [that] doesn’t amount to more than a few pennies at the pump," said Kevin Book, an analyst at ClearView Energy Partners LLC. 

"The bigger concern is going to be the wrath of the hurricane once it comes on shore," said Barbara Shook, senior reporter-at-large for OilMarket Intelligence.

Isaac was still a tropical storm at midday Monday, but forecasters predicted it could pick up strength from the warm waters of the Gulf of Mexico and build into a Category 1 hurricane, capable of sustained winds from 74 to 95 mph. Residents in flood-prone, low-lying areas around New Orleans were being told to evacuate, and a hurricane warning was issued for a 300-mile stretch of the Gulf Coast in four states from Louisiana to the Florida Panhandle. 

Federal authorities reported that 58 percent of oil platforms and 54 percent of oil rigs in the Gulf of Mexico had been evacuated, halting about 78 percent of Gulf oil production.

The storm was expected to make landfall by late Tuesday, almost seven years to the day that Hurricane Katrina slammed New Orleans, killing more than 1,800 people and causing billions of dollars of damage along the coast. It was followed less than a month later by Hurricane Rita. A hurricane hasn't hit the Gulf Coast since Ike in 2008.

"The major problem following Katrina and Rita was damage to the refineries," Shook said. Storms that pass through don't do as much damage, but "if they stay in one place and just blow and rain, that's what causes the damage."

The Energy Information Administration said those devastating 2005 hurricanes were responsible for an increase of 80 cents per gallon in the price of wholesale gasoline.

"You have more to fear at the pump from the water on the ground than from the wind through the rigs," said Book, the ClearView analyst. Onshore damage to the energy infrastructure is almost always a function of flooding, although prolonged power outages are also a threat to distribution, since pipeline pumps are powered by electricity.

"Storm surge and heavy rainfall are other hazards that have the potential to impact the landfall area," Risk Management Solutions said in a new report, warning of the potential for a six- to 12-foot storm surge in southeastern Louisiana and Mississippi.
 
If either refining or distribution in the Gulf is sidelined for days or weeks, drivers could see gas prices go up 10 to 25 cents a gallon, Book said. The national average gas price is currently $3.73 a gallon, up more than 7 percent over the past month. 
 
Some gasoline retailers in the Southeast are taking advantage of the fear factor already. CBS 4 Miami reported one local gas station charging roughly 60 cents a gallon more for gasoline than others in the area. Price-gouging laws, which make it illegal for businesses to hike prices on necessities like gas, water and hotel rooms, have gone into effect in Florida and Louisiana. 
 
Isaac's wide "cone of uncertainty" that stretches all the way from the borders of Texas to Alabama make predicting the storm's impact challenging. This uncertainty drove up oil futures, although prices fell back down on Monday due to speculation that the government will intervene by releasing crude from the Strategic Petroleum Reserve release, according to reports from Reuters and Dow Jones.
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Humberto Alcazar

I am lifelong El Pasoan who has seen El Paso grow from a small town in 1965 to the large city it is today. Attended Cathedral High School, graduated from University of Texas El Paso with an Industrial....

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