Gas Prices Up Amid Threat of Gustav

August 29, 2008 - 4:27 PM
Retail gas prices swung higher Friday - the first increase in 43 days - as analysts warned that a direct hit on U.S. energy infrastructure by Tropical Storm Gustav could send pump prices hurtling toward $5 a gallon.
Gas Prices Up Amid Threat of Gustav (image)

Retail gas prices swung higher Friday - the first increase in 43 days - as analysts warned that a direct hit on U.S. energy infrastructure by Tropical Storm Gustav could send pump prices hurtling toward $5 a gallon.

New York (AP) - Retail gas prices swung higher Friday - the first increase in 43 days - as analysts warned that a direct hit on U.S. energy infrastructure by Tropical Storm Gustav could send pump prices hurtling toward $5 a gallon.

Meanwhile, oil prices ended the day slightly lower, falling for a second straight session. But prices fluctuated sharply as some traders feared supply disruptions and others bet the government will release supplies from the Strategic Petroleum Reserve if Gustav wreaks havoc in the Gulf of Mexico area - home to a quarter of U.S. crude supplies and 40 percent of refining capacity.

Gustav was spinning away from Jamaica on a course toward Gulf Coast states including Louisiana - three years to the day since Hurricane Katrina slammed into the state and tore up oil rigs and refineries.

Fears of another monster storm have sent wholesale gasoline prices shooting up in the Gulf region, forcing filling stations to pass on the costs by raising pump prices ahead of Labor Day weekend.

A gallon of regular gasoline jumped about a penny overnight to a national average of $3.669, according to auto club AAA, the Oil Price Information Service and Wright Express.

That's the first increase since prices peaked at an average $4.114 a gallon on July 17, an all-time high.

Jeff Rubin, chief economist at investment bank CIBC World Markets, said that record could be shattered if Gustav seriously disrupts offshore energy production.

In 2005, pump prices jumped from slightly more than $2 a gallon to above $3 after Katrina and Hurricane Rita destroyed more than 100 oil platforms and damaged several refineries.

"The price consequences could be even worse this time," Rubin said in a report, noting that oil and gasoline inventories are lower than when Katrina and Rita hit. "Any replays of the 2005 storm season could see gasoline prices soar to $5 per gallon."

Gustav was moving northwest of Jamaica after triggering floods and killing 59 people in Haiti and eight more in the Dominican Republic. Forecasters said it could strengthen into a hurricane before striking the Cayman Islands on Friday.

Light, sweet crude for October delivery fell 14 cents to settle $115.46 a barrel on the New York Mercantile Exchange, after earlier rising as high as $118.76. On Thursday, prices fell $2.56 at $115.59 a barrel, the first time this week it closed lower.

Analysts attributed the volatility to doubts over whether Gustav will affect offshore energy production, as well as speculation that the Energy Department will tap the Strategic Petroleum Reserve should the storm threatens supplies.

"Until this hurricane hits, the trend has to be higher toward the $120 level," said Jonathan Kornafel, Asia director for brokerage Hudson Capital Energy in Singapore. "If this turns out to be a nonevent, the market could really come roaring back down."

As Gustav advanced, oil companies were pulling employees off installations.

Royal Dutch Shell PLC has evacuated nearly 670 workers. The company said production will be affected. BP PLC was also removing personnel from the region, while Exxon Mobil said it was bracing its structures for heavy wind and rain.

Transocean Inc., the world's largest offshore drilling contractor, said Thursday it had evacuated about 190 workers from five of its 11 offshore drilling rigs in the Gulf. Transocean has 1,550 workers in the region.

Weather research firm Planalytics predicted as much as 80 percent of the Gulf's oil and gas production could be shut down as a precaution if Gustav enters the region as a major storm.

Forecasters said Gustav might slip between Mexico's Yucatan Peninsula and the western tip of Cuba on Sunday, then march toward a Tuesday collision with the U.S. Gulf Coast - anywhere from south Texas to the Florida panhandle.

"It seems there will be at the very least a slight hit to production," Kornafel said. "But everything is up in the air until Monday or Tuesday."

Gustav is the first storm of the 2008 Atlantic hurricane season to pose a serious threat to offshore oil and gas installations in the Gulf.

Some analysts, however, noted that lower appetite for oil products in the United States could well dampen Gustav's effect on the Gulf area's oil output.

"U.S. oil demand is currently 1.6 million barrels a day lower than when Katrina struck," said Olivier Jakob of Petromatrix in Switzerland. "There is today more U.S. refining capacity offline for economic reasons than can be destroyed by Gustav."

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Associated Press writers Pablo Gorondi in Budapest, Hungary and Alex Kennedy in Singapore contributed to this report.