THE NEW YORK TIMES: Gas Prices Surge as Supply Drops: “The Mars platform of Royal Dutch Shell - which alone accounts for 15 percent of the gulf's oil production - is "severely damaged," the Coast Guard said in a release.”: 1 September 2005

By JAD MOUAWAD and SIMON ROMERO

Published: September 1, 2005

For the first time since the 1970's, gasoline lines reappeared yesterday in some corners of the country.

Three days after Hurricane Katrina dealt a devastating blow to the nation's largest energy hub, the worst-case possibility was quickly becoming a reality: gasoline prices surging well above $3 a gallon, with some consumers complaining of price gouging; service stations in a handful of locations running out of gas; drivers rushing to fill their tanks, only to find themselves waiting in line with others.

After the sudden drop in oil supplies, gasoline sellers were quick to raise their prices. While gasoline averaged $2.60 a gallon earlier in the week, unleaded regular gas was selling yesterday at $3.09 at stations in West Palm Beach, Fla.; $3.49 in Indianapolis; and $3.25 in San Francisco. Premium fuel was going for up to $3.89 a gallon in Chicago.

Shortages and gasoline lines were reported in parts of South Carolina, the Dakotas, Arkansas and Kentucky.

The White House responded yesterday by saying it would release oil from the nation's emergency stockpiles to meet shortages and would relax environmental standards nationwide so that refiners could produce more - but dirtier - gasoline.

"A lot of crude production has been shut down because of the storm," President Bush said outside the White House yesterday after returning from his vacation in Texas. "Our citizens must understand this storm has disrupted the capacity to make gasoline and to distribute gasoline."

In response to the White House announcement, the price of crude oil fell in trading yesterday to $68.94, from $69.81, and the stock market rose as traders looked for signs of relief.

Still, most analysts said that neither move by the federal government was likely to produce much gasoline in the short term or bring prices down anytime soon. The problem is not any immediate shortage of crude oil but rather that crucial oil product pipelines and refineries in the gulf region are unable to operate.

The impact from the hurricane is likely to be felt nationwide for months. Some economists suggest that the disruptions could shave at least one percentage point from a fourth-quarter growth rate that most analysts, until the disaster, expected to reach roughly 3 percent.

Moreover, if oil prices remain around $70 a barrel or higher, they could put the Federal Reserve in an increasingly unpleasant position, caught between the desire to keep inflation low and the pressure to prevent an economic downturn.

The storm, which submerged New Orleans after it slammed into the Gulf of Mexico on Monday, crippled substantial portions of the country's energy infrastructure. In Louisiana, Mississippi and Alabama, electrical power was out, refineries were drowned, and most of the offshore production of oil and gas had not resumed.

While crude oil prices fell, gasoline futures on the New York Mercantile Exchange soared for a third day as traders and analysts tried to determine the severity and duration of the supply disruptions.

Gasoline futures - equivalent to wholesale prices before taxes, distribution and marketing costs - closed at $2.6145 a gallon yesterday, a gain of 5.7 percent. On Tuesday, they jumped 20 percent.

Energy industry officials said the sharp jump in prices was an inevitable market reaction to fears that the only way to balance continued strong demand with tighter supplies was through higher prices, which would serve to keep some drivers from taking extra trips. They said price controls would only make the situation worse by discouraging production.

The government started receiving reports of price gouging at the retail level and said the complaints would be turned over to the Federal Trade Commission for investigation. "We have gotten a number of people concerned about the prices," said Craig Stevens, a spokesman for the Energy Department.

And Reuters reported that Georgia's governor, Sonny Perdue, signed an order to punish gasoline sellers who gouge customers, amid complaints that prices in some cases had risen to $5 a gallon.

Mark N. Cooper, the research director with the Consumer Federation of America, said the issue was not gouging."This is the result of the complete and total neglect of the petroleum industry," Mr. Cooper said. "Refiners are vulnerable, overstretched and not very competitive. Gouging is not the problem. It's a symptom of an underlying disease."

Throughout the South and Midwest, service stations were beginning to experience some shortages in areas where gasoline is usually transported by pipeline from the gulf. Nearly two million barrels a day of refining capacity has been knocked out by the storm and could take weeks to return.

"There are risks of pockets of shortages in various parts of the country," said Edward L. Morse, an executive adviser at Hetco, a New York-based oil trading company. "There should be no gasoline lines in New York and New England, or California, but inland markets, like parts of Illinois, Tennessee, Kentucky or Missouri, Memphis and Atlanta, are vulnerable."

"Lines are hard to predict," Mr. Morse said, because they typically occur "when consumers want to top off their tanks because they're afraid of gas lines."

Some drivers in Illinois, for example, rushed to service stations and formed gas lines because they heard on the radio that shortages were developing, only adding to a sense of panic that feeds on itself. In other cases, drivers topped their tanks in anticipation of the Labor Day weekend.

In parts of South Carolina and a few other places, lines formed because of credible reports that gasoline was in short supply.

"It's obviously very serious," said Guy F. Caruso, the administrator of the Energy Information Administration. "But given time and the industry's proven ability to respond to natural disasters, it will be resolved. Clearly, in the meantime, there will be economic pain."

In North Carolina, Gov. Mike Easley said the state had only one week of gasoline supplies and some stations were already running out of fuel. "We are not out of gas, but we are running low," Mr. Easley said.

In South Carolina, prices topped $3 a gallon for the first time as lines formed at some gas stations. "This reminds me of the 70's," said Ernie Adams, 70, a vacuum cleaner salesman from Union, S.C., who was filling up at a station where several cars lined up at each of the station's 16 pumps. "I burn a lot of gas, and I was hoping I'd never see anything like that again."

According to weekly estimates released yesterday, gasoline stocks in the United States totaled 194 million barrels, enough to satisfy demand for more than 20 days.

Sims Floyd Jr., the executive director of the South Carolina Petroleum Marketers Association, said the worst was yet to come. "We're facing a severe supply shortage very soon."

The Mississippi Delta sits in the middle of a network of pipelines that feed markets as far away as New Jersey and Illinois. Last year, the entire gulf region shipped 4.5 million barrels a day of products to other parts of the country, according to the American Petroleum Institute - most of it by pipelines and the rest by tanker or barges. Pipelines transport 1.9 million barrels a day of crude to refineries in the Midwest.

As many as 10 refiners have formally requested or informally contacted the government about using oil from the Strategic Petroleum Reserve, which currently holds about 700 million barrels of crude, according to Mr. Stevens, the Energy Department spokesman. He declined to identify them until their requests had been approved.

But one company whose loan was accepted on Tuesday evening rescinded its request yesterday afternoon. The problem is that no active refiners are in a position to increase their production to make up for the lost output from storm-damaged refineries.

"It doesn't matter that the government opens the strategic reserves because there is very little slack in the refining business," said Craig Pennington, the director of the global energy group at Schroders in London.

Rising prices, meanwhile, are inevitably turning into a hot political issue. Senator Charles E. Schumer, Democrat of New York, criticized the Bush administration for not moving sooner to tap the oil reserve: "On energy, Americans were expecting a lot more from the president," Mr. Schumer said. "He took a tiny baby step when a giant step is required."

But others said the problem came from decades of underinvestment and a shortage of refining capacity.

This hurricane is a wake-up call that we need to do things across the board on infrastructure and to also expand the base," said Representative Joe L. Barton, Republican of Texas, and the chairman of the House Energy and Commerce Committee. "It's time to not only rebuild what we have, but it's, in my opinion, time to build additional resources so we're not as stressed as we've been."

More than 90 percent of the gulf's daily oil output - or 1.37 million barrels - remained closed yesterday, while natural gas production was down by 83 percent, or 8.3 billion cubic feet, according to the Minerals Management Service, a unit of the Department of Interior.

Coast Guard crews reported that up to 20 rigs and platforms had either sunk or were adrift, Larry Chambers, a public information officer, said. At least one gas rig has caught fire.

The Mars platform of Royal Dutch Shell - which alone accounts for 15 percent of the gulf's oil production - is "severely damaged," the Coast Guard said in a release.

Some relief might come from more imports of gasoline from Europe. The Environmental Protection Agency relaxed pollution standards nationwide to allow the use of lower grades of gasoline. Earlier the agency had relaxed standards in the four states most affected by Hurricane Katrina: Florida, Alabama, Mississippi and Louisiana.

Industry experts expect suppliers from Europe to help fill the gap. But it will not happen overnight. "The United States is the highest-price market in the world right now, and that will attract European products in large flows," said Lawrence J. Goldstein, president of the Petroleum Industry Research Foundation. "That's undeniable. Price is the magnet."

"But we have a liquidity crisis," he added. "We need to create supply instantaneously."

Much of the problem with gasoline supplies is psychological, for consumers as well as investors.

Markets were initially calmed by reports that one large pipeline concern, Kinder Morgan, had indicated that its Plantation pipeline, running from New Orleans to the East Coast, was undamaged and expected to resume operating by Tuesday.

Then, Kinder Morgan unexpectedly pushed back the start-up date for the pipeline, which is capable of 620,000 barrels a day, to yesterday. Then it said there was no clear resumption date.

Some energy industry strategists were adamant that market forces would prevent gasoline lines from forming. Others were not so sure.

"I hate to be an alarmist, but we're in a situation without much precedent," said David Pursell, a principal with Pickering Energy Partners in Houston. "With the gasoline market as tight as it is, people complain about $3 gas but they'll put $5 gas in their car if they suddenly think it's not available."

Robert W. Dalton, in Spartanburg, S.C.; Brenda Goodman, in Atlanta; and Vikas Bajaj, in New York, contributed reporting for this article

http://www.nytimes.com/2005/09/01/business/01oil.html

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