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Gas prices could reach $3 by Labor Day, analysts warn

WASHINGTON—Fears of a further spike in gasoline prices grew Tuesday as oil traders fretted that hurricane damage along the U.S. Gulf Coast region was extensive and could lead to shortages.

For the second consecutive day, crude oil prices on the New York Mercantile Exchange, known as Nymex, crossed the once-unthinkable psychological barrier of $70 a barrel. Unlike Monday's jump, prices raced to $70.85 Tuesday and didn't fall back very far. Contracts for delivery of oil within 30 days closed at just under $70.

Higher oil prices appear set to keep climbing as more bad news from the Gulf of Mexico comes in, increasing the likelihood of $3 a gallon gasoline by Labor Day weekend. The record high gasoline price, when adjusted for inflation, was $3.11 a gallon in March 1981.

Oil prices bounced like a ping-pong ball Tuesday because there was so little new information about the condition of some 700 offshore oil rigs and production platforms. Nor was there much new information about roughly 10 refineries that Katrina directly affected. Apart from Valero Energy Corp. of San Antonio, which detailed damages late Monday to a Louisiana facility, few refiners have said what's happened to their facilities.

"You've got refineries down, production down, pipelines down, refiners allocating supply all over the place. They're restricting the amount they are allowing their customers to pull," said Mary Welge, a senior analysts at the Oil Price Information Service in Wall, N.J. "The retail prices have not reacted full circle yet. We do see increases in retail between 10 cents and 30 cents per gallon. That's a distinct possibility."

The nationwide average for a gallon of unleaded gas stood at $2.60 Tuesday.

What little information that emerged Tuesday wasn't positive. Television news reports showed most of New Orleans under water and the entire region more devastated than had been thought at first. New Orleans' mayor gave word that those left in the city were to be evacuated. And all this damage came from a storm that had weakened by the time it came ashore after tearing through offshore oil operations.

"The percentage of the Gulf of Mexico's daily oil output that is offline due to the aftermath of Hurricane Katrina rose to 95.2 percent from 91.75 percent," Bart Melek, senior economist at BMO Nesbitt Burns, a division of Bank of Montreal, said in a note to investors predicting sharp increases in the price of oil. "The amount of production shut-in now equals 1.427 million barrels of crude oil a day. ... The cumulative lost oil production from the Gulf has now reached 4.635 million barrels."

In past hurricanes, the disruption of oil production and its refinement into gasoline wouldn't be so problematic. But the soaring global demand for oil, particularly in developing nations such as China and India, has left demand and supply almost matched. With tight supplies, the effects of a natural disaster such as Katrina are exaggerated.

The gulf region accounts for more than 45 percent of U.S. refining of gasoline and a third of U.S. oil production.

About the only good news Tuesday concerned the Louisiana Offshore Oil Platform, which handles about a million barrels a day of crude oil imports, about 10 percent of U.S. oil imports. It escaped serious damage.

The U.S. operations of Royal Dutch Shell released a statement saying a reconnaissance flight over its offshore rigs and platforms showed topside damage to its Mars platform, one of the biggest oil-production platforms in the Gulf of Mexico.

ChevronTexaco spokesman Mickey Driver told Knight Ridder that the California oil giant would make no public damage assessment until Wednesday at the earliest.

The Web site Rigzone.com said Tuesday that Chevron had the most to lose from Katrina, with 160 platforms in the areas hit by hurricane-force winds and 230 lashed by tropical storm-force winds.

Chevron Chief Executive Officer David O'Reilly, visiting Indonesia, told London's Financial Times that last year's Hurricane Ivan suggests Katrina will have damaged infrastructure.

"As we really got into it as an industry ... we found lots of challenges—pipelines that had been dislocated—so that even if our platform was up and running we had nowhere to put the oil," he said.

That's just what oil traders fear: damage. And it's why motorists should brace for higher gasoline prices.

"My instincts are that the market is going to stay high for the next two, maybe three, weeks until it all gets sorted out," said Gordon Klemp, the vice president of market intelligence for refined fuels at DTN in Omaha, Neb., which provides analysis and information to weather-related sectors such as energy and agriculture. "You can see there is a lot of panic in the marketplace, particularly on the Nymex among the speculators, making sure nobody gets stuck with a bad decision."

Klemp thinks $3-a-gallon gasoline definitely is possible.

"We are at such a narrow margin of comfort in terms of supply. We are going to have to get used to having this thing run up and run down during disasters," he said.

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(c) 2005, Knight Ridder/Tribune Information Services.

GRAPHIC (from KRT Graphics, 202-383-6064): 20050830 Oil reserves

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