Gas prices rise as refineries shut for Isaac

[August 28, 2012]  NEW YORK (AP) -- Pump prices are heading higher as Tropical Storm Isaac forces several major refineries along the Gulf Coast to halt production in preparation for high winds and heavy rains.

Fear of reduced gasoline supplies sent wholesale gasoline prices up 7.7 cents, or 2.4 percent, to $3.155 per gallon Monday. The average retail price for a gallon of gasoline in the U.S. rose to $3.75 on Monday, and it could pass $3.80 by Labor Day weekend, says Tom Kloza, chief oil analyst at the Oil Price Information Service.

Oil fell Monday because Gulf Coast refineries won't be using as much in the next few days and damage to key oil and gas operations in the Gulf of Mexico seemed less likely as the storm's winds aren't expected to be as strong as some had feared.

Refineries should also escape damage. But refinery owners often shut down operations in advance of a storm. These facilities consume enormous amounts of electric power and generate steam to cook crude oil into gasoline, diesel, jet fuel and heating oil. If a refinery loses power suddenly, operators can't properly clear the partially cooked oil out of pipes, and re-starting the refinery can take several days or even weeks.

If refineries instead conduct what is known as an orderly shutdown, they can re-start as soon as the power supply is assured again. The Gulf refineries will likely stay off line for about three days.

About 1 million barrels per day of refining capacity is expected to be shut down, roughly half of the refining capacity in the potential path of the storm. The U.S. consumes about 19 million barrels of oil products per day.

Marathon Petroleum Corp. said it is shutting down its Garyville, La. refinery. The refinery has the capacity to refine 490,000 barrels of oil per day, making it the third largest refinery in the U.S. Phillips 66 is closing its 247,000 barrel per day refinery in Belle Chasse, La. Chevron Corp. is keeping its 330,000-barell per day Pascagoula, Miss. plant running as of Monday afternoon.

The National Hurricane Center now predicts Isaac will grow to a Category 1 hurricane instead of a Category 2. A Category 1 hurricane has winds ranging from 74 mph to 95 mph.

"The production centers in the Gulf can withstand those low-level hurricanes," said Gene McGillian, oil analyst for Tradition Energy.

About one-quarter of the nation's oil is produced in the Gulf of Mexico. As of Monday afternoon, about 80 percent of Gulf oil production was suspended, according to the Bureau of Safety and Environmental Enforcement. Companies have evacuated 346 oil and gas production platforms and 41 drilling rigs.

Benchmark oil fell 68 cents to end the day at $95.47 on the New York Mercantile Exchange. In London, Brent crude dropped $1.33 to $112.26 on the ICE Futures exchange.

There was renewed speculation that the Obama administration will release oil from the Strategic Petroleum Reserve, the nation's emergency stockpile of oil. The White House has said a release is one option for combatting higher oil prices. Benchmark U.S. oil has risen 22 percent since late June. Brent crude, which is used to price international blends that many U.S. refineries use to make gasoline, is up 23 percent in the same period.

Gasoline prices have risen in recent weeks because of the higher oil prices and refinery problems in the Midwest and West Coast. At $3.75, the national average is at its highest level since May 9 and it is up about 42 cents from the low reached on July 2.

Analyst and oil trader Stephen Schork said in a daily newsletter that gasoline could rise as high as $3.90 by early October, increasing the odds that the administration will tap the SPR in an effort to bring down oil and gasoline prices.

Oil was previously released from the SPR to offset price spikes due to the loss of oil production in Libya last year and after Hurricane Katrina battered the Gulf Coast in 2005.

But if oil production and refinery operations can quickly resume after the storm passes, gasoline prices could soon fall on their own.

Kloza predicts that gasoline will begin to fall after Labor Day -- if another storm doesn't affect supplies -- as refiners switch to cheaper blends of gasoline and the summer driving season winds down. He expects retail prices to fall 20 to 40 per gallon cents in the next several weeks, and he thinks they could be well below $3.50 per gallon by early November.

In other energy trading:

• Natural gas fell 5 cents to $2.65 per 1,000 cubic feet. The government estimated that about 48 percent of Gulf natural gas production has been suspended due to the storm.

• Heating oil rose less than a penny to $3.11 a gallon.

[Associated Press; By JONATHAN FAHEY and SAMANTHA BOMKAMP]

AP Business Writer Sandy Shore contributed to this report from Denver.

Follow Jonathan Fahey on twitter at http://twitter.com/JonathanFahey.

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