Higher Gas Prices a Sure Bet Due to Hurricane Isaac, Fire


"Production halts due to Hurricane Isaac and a deadly explosion at a Venezuelan refinery have pushed U.S. gas prices to a near four-month high."

hurricane issaac

Production halts due to Hurricane Isaac and a deadly explosion at a Venezuelan refinery have pushed U.S. gas prices to a near four-month high.

As the hurricane hit land yesterday (Tuesday), oil and gas production in the Gulf of Mexico had virtually shut down. Oil companies now must wait out the storm before they can assess any damages.

Energy firms in the region have suspended 93% of the typical U.S. oil production and 67% of natural gas in the gulf, according to a report released Tuesday by the Bureau of Safety and Environmental Enforcement. Companies have evacuated 503 platforms and 49 rigs in the region.

In addition, gasoline refiners have shut down approximately 6.7% of total U.S. refining capacity, a move that will lead to reductions in gasoline inventories and short-term price increases. Exxon Mobil Corp. (NYSE: XOM), Phillips 66 (NYSE: PSX) and Valero Energy Corp. (NYSE: VLO) all reported yesterday that they have temporarily shuttered Gulf Coast refining operations.

But Hurricane Isaac's disruptive presence isn't the only strain on the U.S. refining network. There's another major catalyst triggering higher gas prices.

Over the weekend, tragedy struck the second-largest refinery in Venezuela.

An explosion and fire on Saturday at the Amuay refinery in Venezuela killed 48 people, wounded hundreds, and destroyed hundreds of nearby homes. It is the deadliest refining accident in more than a decade.

The government-run Petroleos de Venezuela (PDVSA) owns the plant, which can process 645,000 barrels of oil a day but has been forced to suspend operations.

This is just the latest incident sparking debate about the state of Venezuelan oil infrastructure, which has fueled significant sentiment against President Hugo Chavez's socialistic ventures in the industry. The oil-rich nation continues to experience a high frequency of accidents, production shortfalls and a lack of critical investment to bring oil to the market from its own state-run PDVSA.

The two events led gasoline prices for September delivery to jump 7.68 cents on Tuesday, or 2.5%, to $3.1548 a gallon on the New York Mercantile Exchange (NYMEX).

That's the highest prices have reached since April 30. And little relief is on the horizon.

U.S. auto club AAA said gas prices will likely increase at the pump as Americans take to the highways for Labor Day weekend. In addition, geopolitical tensions with Iran continue to put oil investors on high alert as tensions in the Middle East accelerate into the fall.

Higher Gas Prices to Fuel Election Debate

Higher gas prices are expected to enliven the debate about U.S. energy security and domestic oil production as the November presidential election draws closer.

U.S. President Barack Obama has said he wishes to end several billion dollars in subsidies to the oil and gas industry. Any reduction in tax incentives, however, will likely increase the cost of production, and will be passed on to the consumer in the form of higher oil and gas prices.

The administration has also hinted that it may release millions of barrels of oil from the Strategic Petroleum Reserve (SPR). With a capacity of roughly 727 million barrels, the SPR is the largest government stockpile of oil in the world. However, it isn't typically tapped except in serious emergencies.

Since its development in the wake of the 1973 Arab oil embargo, releases are typically justified by supply disruptions that threaten the U.S. economy. Past examples include the launch of Operation Desert Storm in 1991, Hurricane Katrina in 2005, and last year's conflict in Libya.

But while any SPR release may temporarily stave off higher prices, the effects don't last long once the markets return to equilibrium.

Simply put, Washington is simply attempting to use the reserves for political purposes with hopes of artificially affecting crude prices.

In fact, Money Morning energy expert Dr. Kent Moors has already called such a maneuver misguided and explains that releasing oil from the SPR will do very little except improve the president's political chances.

"There are no political solutions to higher oil (or gas) prices," said Dr. Moors.

James Baldwin
Money Morning

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