This week in Petroleum - Energy Information Admistration

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Released on August 31, 2005
(Next Release on September 8, 2005)

The Sum of All Fears
Hurricane Katrina was a catastrophic event with a human cost than cannot yet be fully evaluated. It was also exactly what oil market analysts feared the most this summer. Analysts contemplated what might happen should a severe hurricane impact oil production and refineries at the height of summer driving season at a time when gasoline inventories were low. Heading into the final week before the Labor Day weekend, inventories were very near the bottom end of the average range in absolute terms, but given growth in gasoline demand over the comparable year-ago period (gasoline demand is 1.2 percent above last year’s level over the last four weeks), the gasoline inventory situation was even tighter. With oil prices rising throughout the year, analysts wondered what might happen should a supply shock occur as well.

Unfortunately for many oil consumers, we will soon see what happens when a supply shock occurs when prices are already at high levels. But the extent to which analysts’ fears are realized will largely depend on how long petroleum infrastructure remains offline. Oil production platforms, import terminals, pipelines, and refineries were affected as a result of Hurricane Katrina, whose path took it directly over many production facilities in the Gulf of Mexico as well as many refineries in Louisiana, as well as one major refinery in Mississippi. As a result, crude oil prices and petroleum product prices have spiked over the last two trading days. However, unlike Hurricane Ivan, which was a major hurricane that affected oil facilities last September and had a more lasting impact on crude oil production in the Gulf of Mexico, it appears that Hurricane Katrina may have a more lasting impact on refinery production and the distribution system. Thus, while the spot price of West Texas Intermediate crude oil rose by almost $4 per barrel (about 10 cents per gallon) between Friday, August 26 and Tuesday, August 30, the spot price of gasoline in New York Harbor rose by 78 cents per gallon. New York spot prices for heating oil and jet fuel jumped by 24 and 34 cents per gallon respectively over the same period. The path product prices take over the next several days or even weeks will largely depend on how quickly refineries can get back to normal operations.

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