Energy Production A Katrina Casualty

Crude oil futures traders work yesterday on the floor of the New York Mercantile Exchange, where oil prices hit record levels as Hurricane Katrina bore down on U.S. oil-producing regions.
Crude oil futures traders work yesterday on the floor of the New York Mercantile Exchange, where oil prices hit record levels as Hurricane Katrina bore down on U.S. oil-producing regions. (By Stephen Chernin -- Getty Images)
By Jonathan Weisman
Washington Post Staff Writer
Tuesday, August 30, 2005

Hurricane Katrina kept energy production all but paralyzed yesterday in one of the nation's main oil-and-gas hubs, shuttering refineries, raking offshore oil platforms, closing pipelines and raising fears that oilpricescould reach debilitating heights in the coming weeks.

By midday yesterday, 615 of the 819 oil platforms in the Gulf of Mexico -- three-quarters of the total -- had been evacuated, according to the Department of the Interior. Oil production dropped by nearly 92 percent, or 1.4 million barrels a day. And natural gas production was down 83 percent. The storm halted barge traffic on the Mississippi River, preventing crude oil from reaching upriver refineries unaffected by the hurricane.

Energy companies warned it will take several days before they can assess the damage to their major facilities in Louisiana, Mississippi and the Gulf of Mexico. But trading of crude oil climbed to a record $69 a barrel on the New York Mercantile Exchange before settling back to close at $67.20, up $1.07 from Friday. Future contracts on gasoline deliveries jumped as much as 24 cents a gallon, and pump prices could rise as much as 15 cents by week's end, some analysts said. Natural gas prices leaped 15 percent while heating oil jumped more than 4 percent.

"It's a pretty big hit," warned John Felmy, an economist at the American Petroleum Institute. "There's no question there will be some very real market impact."

Energy Secretary Samuel W. Bodman hinted that the Bush administration may tap some of the 700 million barrels of oil in the nation's Strategic Petroleum Reserve in the coming days if government analysts determine that crude oil supplies are dangerously low.

"The administration has been clear that the Strategic Petroleum Reserve is a national security asset that can be used to protect American consumers and our economy in the event of a major supply disruption, including natural disasters," Bodman said.

That statement helped deflate some of the speculation that had pushed oil prices over $70 during the night in electronic trading before the market opened.

Price Jump
But Fadel Gheit, an oil and gas analyst at Oppenheimer & Co., said the shock to oil and gasoline markets will come not from a disruption in the supply of crude, which a release from the reserve could alleviate, but from bottlenecks at refineries that turn it into gasoline. Refining capacity had already been stretched near its limit by rising summer demand for gasoline. At least a half-dozen major refineries from St. Charles, La., to Pascagoula, Miss., were evacuated over the weekend, squeezing the flow of gasoline by 1.8 million barrels a day, at least 10 percent of the U.S. demand.

"The problem is not lack of oil supply. It's lack of oil refining capacity," Gheit said. "You can give me all the oil you want, but our cars do not run on crude oil."

Damage to operations in the Gulf could push oil prices to $80 a barrel by the end of September, a level that would rival the inflation-adjusted prices of the early 1980s, when oil shocks helped send the economy into recession, said Amy Myers Jaffe, an energy research specialist at Rice University's James A. Baker III Institute for Public Policy.

Hurricane Ivan sent oil prices up $10 a barrel over several weeks last fall, as surveyors uncovered undersea mudslides that had damaged pipelines and knocked drilling platforms off their moorings. Katrina hit the Gulf with even more force, at a time when speculators were already pushing gasoline and natural gas prices higher.

"The second we get close to $80, speculators will drive up the price just to get there," Jaffe said. "Clearly, $80 is achievable in this marketplace."

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