Gustav loses stranglehold on energy prices

September 1, 2008 3:06:30 PM PDT
The punch of Hurricane Gustav appeared to fall softly Monday on the nation's vast energy complex along the U.S. Gulf Coast, and was overshadowed by growing anxiety over the state of the global economy. Even as 110 mph winds raked refineries that line the coast and rushed over the deep-water rigs off the shores of Texas and Louisiana, the price for a barrel of oil plummeted by more than $4 a barrel amid a broad sell-off in European and Asian markets.

The storm's impact on production platforms, drilling rigs and other equipment will not likely be fully known for another day or so.

Assuming no damage, it typically takes two to four days to restart a refinery, depending on its size. It can take a day or two to get offshore oil and natural-gas production going again. In 2005, hurricanes Katrina and Rita knocked out the region's offshore energy infrastructure for several weeks.

Transocean Inc., the world's largest offshore drilling contractor, said Monday afternoon it appeared its three moored, semisubmersible rigs in the Gulf remained anchored in position during the storm.

"We still need to send at least one spotter plane out to double-check," the company said.

Transocean said eight other rigs that used thrusters to move out of the storm's path also were safe and would be moving back to their drilling locations as soon as Monday evening.

In recent days, oil companies shut down virtually all oil and natural gas production in the Gulf, and the storm's threat halted about 15 percent of the nation's refining capacity based in the region.

Any serious damage to oil platforms and rigs or prolonged refining disruptions could cause a spike in energy prices. Eqecat Inc., a risk modeling firm, projected Monday that Gustav could knock out capacity for about 5 percent of both oil and natural gas production for the next year.

However, one factor likely to mitigate the impact on prices is that many analysts believe the country's appetite for fuel has been reduced by high prices and slower economic growth.

"U.S. demand has fallen dramatically," said Linda Rafield, an analyst at Platts, the energy information arm of McGraw-Hill Cos. "People look like they're making what I'd call a long-term adjustment in consumption patterns."

All that appeared to be supporting oil prices over the past week was Gustav. With many betting the U.S. energy complex in the Gulf survived largely intact, attention returned almost immediately to the state of the global economy.

Markets in Asia tumbled sharply. The sell-off in Europe was less pronounced.

Light, sweet crude for October delivery fell $4.34 at $111.12 in late afternoon electronic trading on the New York Mercantile Exchange. On Friday, the contract fell 13 cents to settle at $115.46 a barrel.

The U.S. Gulf Coast is home to nearly half the nation's refining capacity, while offshore the Gulf accounts for about 25 percent of domestic oil production and 15 percent of natural gas output.

Gustav churned through an area with one of the Gulf's vital assets: the Louisiana Offshore Oil Port, which shut down operations over the weekend. The facility handles about 12 percent of the nation's crude imports and is tied by pipeline to about half the nation's refining capacity, much of it along the Mississippi River from the New Orleans area north to Baton Rouge.

Any prolonged closure of LOOP, as it's called, could severely disrupt crude imports and their shipment to refineries. LOOP is located about 18 miles south of Grand Isle, La.

"We will not attempt to assess damage (if any) until the storm passes," said Mark Lambert of the Louisiana Department of Transportation. "We have no reports, either confirmed or unconfirmed, of damage to LOOP."

The petroleum industry has spent hundreds of millions of dollars since the catastrophic hurricanes of 2005 strengthening its operations both offshore and inland. The enhancements include stronger moorings for production platforms, deeper pipelines and greater supplies of backup electricity and other supplies.

"The industry is much better prepared this time around to cope with any wind or water damage," said Rafield. v Gustav's strength at landfall was nowhere near that of Katrina and Rita, a factor that oil analyst Jim Ritterbusch said likely contributed to falling oil prices.

Eating away at prices even before the storm entered the Gulf were suggestions that additional crude supplies would enter the market if Gustav caused severe damage to the Gulf's oil facilities and hampered production.

The Paris-based International Energy Agency said Monday it was closely monitoring the storm and, "bearing in mind prevailing market conditions, ... stands ready to act quickly and provide oil to the market as it did after Hurricane Katrina in 2005."

The IEA is the energy watchdog for the Organization for Economic Cooperation and Development, a grouping of the world's most industrialized countries.

Many also were betting the U.S. government would release supplies from the Strategic Petroleum Reserve if supplies became tight.

"That's helped put a fair amount of selling into this market, just the security of knowing we have alternative supplies available," said Ritterbusch, president of energy consultancy Ritterbusch and Associates.

Louisiana Gov. Bobby Jindal called on President Bush to release oil from the strategic petroleum reserve, saying fuel shortages in his state could slow down rescue operations and overall storm recovery. Jindal said 85 percent of south Louisiana filling stations have no fuel.

"We think it's necessary. We think it's the right time to do this," Jindal said at a news conference. "We need this fuel, we know we're going to need this fuel by Thursday."

Scott Angelle, Jindal's natural resources secretary, said his office has submitted the paperwork to the federal Department of Energy to set up what would essentially be a loan of crude oil from the federal government to the oil companies. Angelle said Louisiana's refineries now have a three-day supply of gasoline that could go out to gas stations.

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