The Katrina factor and energy prices

The prospect of damage to oil installations could send the price of gasoline to $3 a gallon.

Energy markets, already strained by robust demand and tight refining capacity in the United States, are now being roiled by a new force: the Katrina factor.

One of the largest hurricanes in US history is already raising energy costs. By midday Tuesday, the wholesale price of gasoline in the futures market was $2.37 a gallon, which would indicate a retail price above $3. A barrel of oil had soared to more than $70, almost $4 more than two days ago. Home heating oil was up about 20 cents a gallon.

How long prices will remain this high depends on how much damage has been done to the energy installations located in and around Katrina's landfall. Some 21 percent of the nation's natural gas originates under the Gulf, and 30 percent of domestic crude-oil production occurs in the region (accounting for 7 percent of total US oil supplies). To alleviate any shortages of crude oil caused by damage to the platforms supplying Gulf Coast refineries, the Bush administration is expected to open the spigot to the Strategic Petroleum Reserve.

Even seasoned observers were stunned by the sharply rising prices on the futures markets. With 10 percent of America's refining capacity shut down by the storm, and another 10 percent affected, the markets are moving on very little information, says John Felmy, chief economist at the American Petroleum Institute. "Right now, the short-term markets are going a little crazy," he says. "If there is little damage, they can reverse themselves."

In coming days, government and industry officials will inspect the maze of pipelines that moves oil and gas onshore, as well as the platforms where oil is unloaded. Government inspectors also have to check every oil rig for safety before crews can return. The industry itself, counseling consumers to use energy wisely, says it could be several days until the extent of the damage is known.

"This is a severe but temporary situation," says John Lichtblau, chairman of the Petroleum Industry Research Foundation in New York. "Repairs can be done."

Many energy analysts are counseling consumers to remain calm. Despite the importance of the Gulf refineries, plenty of gasoline is available, they note. And it's only days until Labor Day, considered the end of the peak gasoline season.

"There are adequate supplies relative to demand," says Mark Routt, an analyst at Energy Security Analysis Inc. in Wakefield, Mass. "There are 19 days of gasoline relative to demand."

Despite the stockpiles, political pressure mounted to open the Strategic Petroleum Reserve (SPR), and the White House has signaled it would be willing to do so. Already, CITGO Petroleum has said it would need 250,000 to 500,000 barrels of oil for its refinery in Lake Charles, La. The SPR has more than 700 million barrels of oil in storage in Texas and Louisiana.

"It might be a move that is more symbolic than having a real effect," says Tim Considine, a professor of natural resources at Pennsylvania State University and an SPR expert. "There could be greater impacts with the outages of refineries in and around New Orleans and damage to the platforms, rigs, and offloading facilities."

Last year the White House loaned oil from the SPR after hurricane Ivan created underwater landslides that damaged pipelines bringing oil ashore. About 5 million barrels of oil were withdrawn. The Bush administration maintained that the release of the oil was aimed at alleviating shortages and not at lowering oil prices, which had hit $50 a barrel.

The natural-gas industry is also waiting to see if any damage has been done to the more than 3,000 rigs that produce the majority of gas used by Americans to keep warm. Fortunately, 90 percent of the gas wells are west of New Orleans, farther away from the center of the hurricane.

"They would have been impacted by the waves and rain but not by the blunt force," says Chris McGill, a policy analyst at the American Gas Association. "There will be parts of the Gulf where they will be up and running in 48 hours, but there will be other extremes of structural damage that may take weeks or months to repair."

The industry is uncertain about damage to onshore infrastructure. "If there are facilities on shore that are underwater ... it will impede the movement of gas or oil," says Mr. McGill.

The natural-gas industry has already moved a significant amount of its product into storage for winter. About 2.6 trillion cubic feet of natural gas is in storage, a level that is behind last year but is more than the five-year average, McGill says. When storage hits 3 trillion cubic feet, he says, they are usually considered to be full. "We still have time to add to the storage," he says. "We still have three months of hurricane season left."