Energy $7 A Gallon Gas?
Scott Reeves, 09.23.05, 5:30 PM ET
< http://www.forbes.com/energy/2005/09/23/hurricane-rita-fuel-cx_sr_economy_0923ritafuel.html>
Wind or water? The answer to where fuel prices will be in the coming weeks will turn on the question of how Hurricane Rita strikes the Gulf Coast.
Ironically, a fast-moving storm with powerful winds may actually be less damaging to the refineries clustered outside of Houston than a slower storm deluging the area in rain, and could mean less impact at the pump.
Analysts say that refineries rarely suffer catastrophic wind damage and that the real danger is flooding. The refineries in Texas are on higher ground than those in Louisiana and therefore are better able to withstand a hurricane.
Extensive flooding in Port Arthur, Tex., or Lake Charles, La., would cause prices to spike, possibly as high as $6 or $7 a gallon, doubling the widespread assumptions of $3-a-gallon gas that are expected in the aftermath.
Either way, it's going to be disruptive. With refiners shutting down and assuming 4 million barrels per day of capacity is shut in for at least five days, the lost production would amount to 20 million barrels. Gasoline, currently the tightest product, with inventories 500,000 barrels below the five-year average, "runs the greatest risk of tightness and price increases," analysts say. (See: "Rita Recovery May Be More Protracted Than Katrina's.")
"Rita will have a significant impact on petroleum product markets even without significant damage similar to Hurricane Katrina," Merrill Lynch (nyse: MER - news - people ) analysts conclude.
Gasoline prices hit $5.87 a gallon in parts of Georgia, but regional spikes won't become a national trend if Rita packs less wallop than originally feared. The American Automobile Association's daily survey of prices on Friday pegged the national average for regular unleaded gasoline at $2.748 a gallon, $2.918 for midrange gas and $3.025 for premium. The average price for diesel is $2.826 a gallon.
As for heating oil supplies in the Northeast, it's still too early to worry. Mid-Atlantic and New England residents should have adequate supplies if production resumes quickly. The current price is about $1.90 a gallon.
Analysts say energy companies with more than 15% of total refining capacity located within the path of Rita are Valero Energy ConocoPhillips Exxon Mobil and BP (.
The U.S. Minerals Management Service on Thursday reported that 605 platforms in the Gulf were unstaffed, compared with 469 on Wednesday. More than 90% of the region's oil production was blocked, while more than 65% of natural gas production was affected.
In the last two weeks, as the damage from Katrina was repaired and production cranked up in Louisiana, average gasoline prices dropped about 28 cents a gallon. But the end of hurricane season won't mean a return to cheap gasoline. Other factors are also coming into play: demand and politics.
"We expect global demand for all forms of energy to grow at about 1.7% per year on average, rising more than 50% from about 220 million oil-equivalent barrels per day currently to 335 million oil-equivalent barrels daily by 2030," Rex W. Tillerson, president of ExxonMobil, recently told the Brigham Young Alumni Association.
ExxonMobil's Energy Outlook projects spiraling demand in developing regions: Latin America, up 85%; China, up 100%; and India, up 164%.
Another worry: politics. Jerry Taylor, director of national resource studies at the Cato Institute in Washington, D.C., says the latest round of attacks on "profiteering" are misguided and counterproductive. Injecting politics into the allocation process in the form of price controls may lower prices in the short term, but quickly leads to shortages because demand isn't tempered by the market price.
"One side believes prices are established by supply and demand," Taylor says. "The other believes prices are the result of conspiracy, whim or production costs."
Taylor says this happened in 1973 when President Nixon imposed price controls on oil. The result was long lines at gas stations. Former California Gov. Gray Davis failed to learn this lesson in 2000 and 2001 when he refused to lift retail price controls on electricity. With little or no concern about keeping the monthly bill down, careless use soon led to rolling blackouts in a state with little or no excess capacity. Hawaii's latest foray into price controls won't change the law of supply and demand.
Still, the Federal Trade Commission, perhaps bowing to the perceived need to "do something," is investigating whether oil companies have constrained prices to artificially boost prices.
"A determination that unlawful conduct has occurred will result in aggressive law enforcement activity by the FTC," John Seesel, an FTC lawyer, told a Senate Commerce Committee hearing on Wednesday.
Another danger: taxes. The Foundation for Taxpayer and Consumer Rights in Santa Monica, Calif., says there's a danger that government will become hooked on higher revenues generated by the current spike in prices. It therefore recommends a "Windfall Profits Rebate" to consumers.
The group calculates that its plan would refund 20 cents a gallon at current prices, or about $3.7 billion a year.
"The Windfall Profits Rebate would encourage consumers to reduce demand, industry to increase available supply, and eliminate the financial incentives for oil companies to short the market," the group says in a report titled "The Partnership Evolving Between Oil Companies and Government."
In the meantime, remember that supply and demand is a force of nature more powerful than any hurricane.
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