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Gas prices expected to drop soon, but supply will likely remain tight

WASHINGTON—A week of uncertain energy prices awaits motorists after record high prices for gasoline throughout the long Labor Day weekend.

The AAA motor club reported Monday that the nationwide average for a gallon of gasoline was $3.05, although prices were much higher in most major metropolitan areas.

But prices could start dropping as soon as this week.

"I think there will more or less be a return to normal. We are finding more (oil) rigs coming back, refineries are coming back, pipelines are coming back. It would appear the worst is behind us," said Peter Beutel, an oil analyst with Cameron Hanover in New Canaan, Conn.

Power was restored to three-quarters of the storm-tattered Gulf Coast region over the weekend, allowing pipelines to increase the flow of oil and gasoline, especially to the East Coast, which has seen spot shortages and runs on gasoline stations.

The Bush administration has opened emergency oil stockpiles, and European allies late last week pledged to send 30 million barrels of oil and gasoline from their emergency supplies to the United States to help bridge short-term supply disruptions.

Offsetting that good news, the federal Minerals Management Service said Monday that offshore oil production in the Gulf of Mexico had returned to only 32 percent of its normal capacity.

The Energy Department confirmed over the holiday weekend that a ConocoPhillips refinery in Belle Chase, La., and a ChevronTexaco refinery in Pascagoula, Miss., suffered major hurricane damage. Combined, they have a capacity of refining 572,000 barrels of crude oil a day into gasoline and other products. And the biggest refinery in the Hurricane Katrina-affected area, ExxonMobil's plant in Baton Rouge, La., is running below capacity.

Still, crude oil prices fell almost $2 a barrel on the New York Mercantile Exchange (Nymex) on Friday, ahead of the three-day weekend. In London, where contracts for future delivery of oil are also traded, crude oil prices returned to pre-Katrina levels Monday, falling by $1.26. That's a good omen for the resumption of oil trading Tuesday on the Nymex.

Several important refineries in the areas hit hardest by Katrina returned to operation over the holiday weekend or planned to restart during the week.

Valero Energy Corp., based in San Antonio, Texas, and the biggest refinery operator, said Monday that its St. Charles, La., refinery would be operational by midweek. It can process up to 185,000 barrels of crude oil per day. Spokeswoman Mary Rose Brown said three other Valero refineries "returned to normal operations this weekend."

The reduced levels of refining are a major reason gasoline prices are so high.

For months, U.S. refineries have been running at full throttle to keep up with U.S. demand for gasoline.

After Katrina's landfall, gasoline wholesalers began rationing supplies to service stations. Some stations ran out of fuel as customers in Florida, North Carolina, Maryland, Virginia, Georgia and elsewhere rushed to fill up.

In Lothian, Md., once the nation's tobacco heartland, the Dash-In convenience store that sells Shell gasoline ran out of regular unleaded on Friday. By Monday, the station had gasoline, but customers were staying away, apparently put off by the earlier shortage.

"We've lost a tremendous amount of business," said Jane Bauer-Schalski, the store manager. "We're very slow. It's been dead."

Just up the road, a Chevron station was told Friday by its supplier to expect about 65 percent of its normal shipment, said clerk Ann Call. Customers crammed the station at the start of the three-day weekend, fearing supplies would run out.

"They just kept coming. It never stopped," she said, complaining that gas prices are hitting her hard. "People like me who don't make a lot of money, it takes half my pay to fill up the car."

Several service station managers, owners and employees said they didn't know how wholesalers decided how much gasoline to allocate to individual stations.

Shell Oil Products spokesman Shawn Frederick in Houston said allocation decisions weren't arbitrary.

"The allocation limits are a function of available supply at any given time and are tied to historical demand from individual wholesale and retail customers," he said. "These allocations are carefully reviewed and adjusted on a daily basis. We are adjusting our allocations upward at individual terminal locations as quickly as the supply situation permits, while attempting to avoid complete runouts" at stations.

Even if gasoline supplies recover, high global demand and tight supply mean world oil and gasoline prices are likely to remain vulnerable for many months. The most immediate threat is the potential for more hurricanes until the storm season ends in November.

"I think that's going to keep (gasoline and oil) prices from dropping dramatically," said Beutel, the oil analyst.

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

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