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Last Updated: May 31, 2008 - 8:42:48 AM

                                                                                                                              

On June 12, the national average retail price of regular gasoline rose for the second week in a row to $2.91 per gallon, up 1.4� from the previous week, as reported by the Energy Information Administration (EIA). The Gulf Coast had the largest jump � 4.1� per gallon. Some observers attributed the higher Gulf Coast prices to increases in the price of ethanol, which approached $4.00 per gallon. Still, the Gulf Coast remained the region with the lowest prices, with an average of $2.81 per gallon. The only region where the price decreased from the prior week was the West Coast, where the average fell by 3.9� per gallon (with California�s price falling by 4.4� per gallon).

Last week, EIA released its latest forecast for the national average retail gasoline price for this summer�s driving season (which EIA defines as April through September). That forecast is for an average price of $2.76 per gallon over the six-month season, which is up 5� from the summer forecast that EIA issued in May.

The 2005 Hurricane Season

Obviously, 2005 was a very bad year for hurricanes in the United States. Five major storms struck the Gulf of Mexico, disrupting oil and gas production. The two most destructive storms, Katrina and Rita, caused substantial damage to crude oil and gasoline infrastructure along the Gulf Coast and offshore in the Gulf. Katrina was the most severe, and it resulted in the shut-in of over 95% of offshore Gulf crude oil production, or roughly 27% of total U.S. crude oil production. Katrina also forced the shutdown of nearly a dozen refineries in eastern Louisiana, Mississippi, and Alabama.

Hurricane Rita had an even larger effect on gasoline production capacity than Katrina. Rita hit the much larger refining centers in the Louisiana area of Lake Charles and the Texas areas of Beaumont, Port Arthur, and Houston. Rita forced the closing of 20 Texas and Louisiana refineries accounting for more than four million barrels a day � more than 26% of United States refining capacity. Crude oil pipeline disruptions caused by Rita reduced production at refineries as far inland as Memphis, Tennessee, and Lima, Ohio.

As a natural result of this disruption of crude oil and gasoline supplies to regions throughout the United States, gasoline prices rose rapidly in the immediate aftermath of the hurricanes. The average price of a gallon of regular grade gasoline in September 2005 was $2.95, a 16.7% increase over the August average price. Four weeks after Rita, however, these prices had returned to pre-Katrina levels.

Stormy Weather Ahead?

The 2006 hurricane season has just begun. Tropical storm Alberto struck Florida on June 12. What should consumers expect over the coming hurricane season, and how will this year�s storms affect gasoline prices?

On June 6, the EIA issued its first-ever attempt to predict possible supply disruptions from the coming hurricane season. The study identified three major sources of uncertainty in making such forecasts: (1) how many tropical storms will occur, (2) how intense and long-lived the storms will be, and (3) where they will strike. The National Oceanic and Atmospheric Administration (NOAA) has forecast an above-normal Atlantic hurricane season for 2006, in terms of both the frequency and the intensity of storms. NOAA has predicted that there will be 8 to 10 hurricanes during the 2006 season, of which 4 to 6 will be classified as major storms. These numbers, however, are still well below 2005's record experience of 15 hurricanes.

After Alberto, the first tropical storm of the season, motorists may wonder how likely it is that storms will cause strong price spikes in the coming months. Usually fewer than one-third of Atlantic tropical storms or hurricanes pass into the Gulf of Mexico, and the disruption to oil production from those that entered the Gulf was relatively minor until 2005. Given these factors, the EIA estimates that the most likely loss from hurricane damage would be the equivalent of 1.8% to 2.7% of annual crude oil production from the country�s Outer Continental Shelf. Also according to EIA estimates, there is only a 5% probability that this loss would be greater than 5.6% of annual production. Because Gulf crude production represents only about 20% of U.S. crude supply, the relatively small loss predicted by EIA suggests that motorists are unlikely to see gasoline price jumps caused by storm-related crude oil price increases at the end of this summer. EIA did suggest that we might see more volatile prices in commodities markets � which would include crude oil � this hurricane season. This prediction was borne out when domestic crude oil prices jumped on June 9 with the news that a storm might develop over the weekend, then fell back on June 12 when it became apparent that Alberto would miss the major oil-producing areas.

In response to last year�s storms, companies are taking steps to lessen the potential damage during 2006. Offshore drilling rig owners are strengthening their rigs and increasing the number of mooring lines designed to keep them in place during storms. Onshore, a number of pipeline companies have added new interconnections to their networks, so that they can have alternate routes to ship refined products in case of damage to one part of the network. Refiners have installed additional generators so that at least production can continue, or be more quickly restored, if power is knocked out in a storm. Some refiners also have added backup communication networks in preparation for the 2006 storm season.

While these measures reduce the chances of regional or even nationwide supply reductions, motorists in areas hit by a hurricane can expect to experience disruptions of local gasoline supplies due to widespread power outages and possible road closures. As we brace for what is to come, all parts of the gasoline distribution system appear to have learned from last year, and the network has been strengthened in crucial parts. As a result, hopefully it will be better able to withstand storm damage and keep gasoline flowing to U.S. markets.