Hurricanes Could Lead To $6 Gas

By David Goldman, CNNMoney.com staff writer

NEW YORK — Batten down the hatches: hurricane season starts on June 1. It’s expected to be a rough one, threatening to upend refineries and disrupt pipelines in the southern United States.

And that could send gas prices, already nearly 20% above what they were last year, soaring even higher.

That’s what happened three years ago when the Gulf Coast was battered by two hurricanes – Katrina and Rita – in the span of a few weeks.

“With the market the way it is now, a move in crude because of a hurricane could really be exacerbated,” said MF Global energy analyst Don Luke.

Peter Beutel, oil analyst at Cameron Hanover Beutel, said if a Katrina-like hurricane were to hit in July, gas prices could go as high as $5 or even $6.

“The last thing this market needs at this time is a hurricane, because we can’t afford to lose any of our refining capacity at this point,” said Beutel. “If anything bullish happens with the market in this state, it would make it go absolutely crazy.”

Like any disruption to supply, when a hurricane takes out drilling platforms and refineries, supply and demand principles lead to a jump in crude oil gasoline prices.

But even before the start to hurricane season, speculative traders have started to send oil and gas prices higher in anticipation of a hit to supplies.

“We’re already seeing a hurricane premium on gas of about five to 10 cents per gallon,” said Alaron Trading energy analyst Phil Flynn. “Especially since Katrina, we’ve seen traders build that into prices.”

The last huge gas spike caused by a hurricane happened in the late summer of 2005, when Katrina and Rita brought many Americans their first glimpse at $3 a gallon for regular gas. The destruction from Hurricane Katrina alone led gasoline prices to jump 46 cents, or 17%, in just one week to a national average of $3.11, according to the U.S. Energy Information Administration.

Though we may never again see two Category 5 hurricanes enter the Gulf of Mexico in the span of only a few weeks, it may not take a similar occurrence to see a similar boost in gas prices again. Oil prices have soared through the roof on seemingly any kind of bad news recently, so analysts admit that this hurricane season’s effect on gas prices is difficult to predict.

On the other hand, if no hurricane hits this season, Beutel said gas prices may fall off a bit. But with hurricane season ending Nov. 30, we’ll have to wait until December to find out.

“That would have some downward pressure on prices, but who knows where we’ll be at that point – we could be a dollar higher or lower than where we are now,” he said.

The perfect storm

The National Oceanic and Atmospheric Administration (NOAA) released its tropical storm forecast Thursday morning, saying there is a 65% chance of a stronger-than-average hurricane season and only a 10% chance that it will be weaker than normal. The outlook indicates a 60% to 70% chance of 12 to 16 named storms, with six to nine becoming hurricanes and two to five turning into major hurricanes.

But it doesn’t take a strongly active hurricane season to cause major disruption to oil drilling and gasoline production in the Gulf.

“The makeup of a storm can have all the difference,” said Flynn. “Slow moving storms have a tendency to churn up underground pipelines, so you don’t need a category five to do a lot of damage.”

Andy Radford, policy adviser for oil industry trade group American Petroleum Institute (API), said the average hurricane halts oil drilling production for over a week. Rig workers are forced to evacuate two to three days before the storm hits, and as soon as it’s safe to return, they have to check for damage and restart production.

“When the offshore oil pumps get shut down, it takes a lot to get them back on,” said Radford.

He said those big storms in 2004 and 2005 did considerable damage to oil drilling platforms in the Gulf of Mexico, severely cutting into supply to gasoline refineries on the shore.

Though slow-moving, weak tropical storms over the Gulf of Mexico can halt oil drilling, powerful hurricanes that hit land can knock out refineries. That’s because about 40% of U.S. refining capacity is located on the Gulf Coast, namely in oft-hit states like Texas and Louisiana. After Katrina and Rita, 30% of Gulf Coast refineries were shut down or operating with reductions.

“Because refining of crude oil into gasoline and other oil products is critical to meeting our nation’s daily energy needs, disruptions in these operations can have an immediate impact on the nation’s gasoline supply and petrochemicals,” said Royal Dutch Shell Plc (RDSA) spokeswoman Robin Lebovitz.

And even though NOAA predicted a high number of strong, named storms for the 2008 season, no one can tell whether or not they will make landfall.

“You can have a very active season but none will make landfall, or a very inactive season but they all hit land,” said NOAA spokesman Dennis Feltgen. “There’s no way to predict if they will hit yet, because that science just doesn’t exist.”

It’s rare for a refinery to be totally knocked out by a hurricane, but many are susceptible to wind and water damage that can limit supply to and from the facilities. Similar to offshore drilling platforms, refineries are sometimes shut down for more than a week before they can return to full operability, according to API Refining Issues Manager Cindy Schild.

Part of the reason Katrina and Rita led to such a spike in gas prices was that there weren’t enough functional facilities to make up for the lost output. Although capacity at many U.S. oil refineries has been expanded, there hasn’t been a new refinery built in the United States in three decades.