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Serving: East

Although Gulf oil recovering: Diesel price rises to 50-year record

The Gulf coast region is slowly recovering its oil refining and distribution capability after it was shut down by the fury of Hurricane Katrina.

In fact, a return to near-normal operations before the end of the year is possible, barring additional hurricane activity in the region, according to a report from the Energy Information Administration. EIA is the statistical agency of the U.S. Department of Energy.

On Aug. 29, Hurricane Katrina caused significant direct damage to offshore rigs, refineries, pipelines, and ports in the Gulf of Mexico, with widescale electricity outages and flooding exacerbating the already devastated infrastructure, compounded by the evacuation of thousands of employees.

According to the EIA report, Katrina initially reduced oil supplies by an estimated 1.4 million barrels per day and natural gas supplies by an estimated 8.8 billion cubic feet per day.

In addition, about 1.9 million barrels per day of crude oil refining capacity was shut down as Katrina approached. Following the storm a number of other refineries were forced to reduce operating rates because of disruptions to oil supply and product distribution systems and electricity outages.

The loss of oil production led to nationwide runs on fuel at the pump, higher fuel prices and fear that gasoline and diesel fuel rationing would occur.

According to EIA, electricity has now been restored to most refineries, and major pipelines are resuming operations. Rationing of fuel is not a likely scenario.

In addition, actions were taken by the government to improve the supply situation, including the loan of crude oil from the Strategic Petroleum Reserve, the offer of SPR oil for sale, the waiver of the Jones Act to facilitate shipments between U.S. ports, and the nationwide waiver on the requirements for summer gasoline and for low-sulfur diesel.

While these developments helped push crude prices lower in early September, EIA forecasts fuel prices are likely to remain relatively high through 2006 compared to price levels of 2003-04. A little over 50 percent of the per gallon price for diesel and gasoline comes from the crude oil cost, with the remainder from distribution, marketing and tax.

EIA suggests three outcomes for oil and natural gas supply over the next several months and through 2006 — fast, medium and slow recovery scenarios — in the aftermath of Katrina.

In all cases, a return to normal oil and natural gas operations and distribution could happen by December. With a medium recovery, all but about 900,000 barrels per day of crude oil refining capacity is expected to be back by the end of September.

The September average for crude is expected to be under $70 per barrel in the medium recovery scenario, $67 in the fast recovery scenario and over $72 per barrel in the slow recovery scenario.

Crude oil prices averaged $65 per barrel in August and spiked to over $70 shortly after Hurricane Katrina shut down oil production in the Gulf. Continued high crude oil prices were expected prior to Hurricane Katrina and worldwide petroleum growth is projected to remain strong during 2005 and 2006, although not as strong as in 2004.

The average pump price for regular gasoline on Sept. 6 was $3.07 per gallon, up 46 cents per gallon from the previous week (a record weekly increase) and up $1.22 per gallon from one year ago (also a record increase).

The average pump price for the third quarter, 2005, is now expected to be about $2.57 per gallon for regular, up 68 cents per gallon from the third quarter of last year.

Improvements in the petroleum supply situation should result in pump price decreases from current prices by the end of the year. In the medium recovery case, fourth quarter regular gasoline prices are expected to average $2.58 per gallon.

Meanwhile, retail diesel prices have jumped from an average of $1.50 per gallon in 2003 to $2.41 expected for 2005. Retail prices are expected to average $2.50 per gallon in 2006. This month, retail diesel fuel prices are expected to hit their highest average monthly level ever, at over $2.71 per gallon. Recently, farm diesel was running about 30 cents less than retail diesel.

This is a double-whammy for Mid-South farmers — increased fuel usage to irrigate their crops during an extremely dry season combined with the highest diesel prices in 50 years, adjusted for inflation.

According to Mississippi State University agricultural economist Steve Martin, many cotton producers in Mississippi have made twice as many irrigation applications as they normally would due to dry weather. Rice producers have spent 60 to 80 percent more on fuel this year.

Higher fuel prices are curbing petroleum demand growth, according to EIA. In a medium recovery scenario, total petroleum demand growth in the United States in 2005 is projected to average 100,000 barrels per day, 60,000 barrels per day less than projected.

The EIA report also stressed that the severity and location of hurricanes over the next few months could continue to influence U.S. and world oil markets. September and October are typically the peak months for tropical storm activity.

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