Don't Sweat Gas Prices - Forbes.com

Fun fact: A year ago, Exxon Mobil shares were trading 35% lower than they are today. Wal-Mart Stores' shares were trading 35% higher.

A coincidence? Perhaps. But it does tell us a lot about which way the nation's economy is going right now. Resources are shifting. To be sure, there may be other reasons playing into why Wal-Mart (nyse: WMT - news - people ) has fallen, but overall, investors are betting that consumers will be spending on expensive gasoline now, and expensive heating oil and natural gas this winter, instead of plasma TVs.

All we have to do is look at the consumer confidence numbers--the worst monthly plunge in 15 years, since 1990 when we were in the midst of a recession and the first Gulf War.

So, should you worry? I wouldn't. Not long term, at least. We've been here before, we'll be here again. And we'll survive.

Remember when gas prices passed $1 per gallon? Guess. (Don't read further until you've done that, because I'm going to give it away very soon. A hint, not so very long ago.) How about when they passed $2 per gallon?

Regular unleaded gasoline first passed the $1 mark in September 1979, according to the Department of Energy. Jimmy Carter was president, and two months later Americans were taken hostage at the U.S. Embassy in Tehran. The next November, Ronald Reagan was elected president because of all these issues. Still, by March 1986, we were back down below $1 per gallon, and we stayed there for three more years.

And $2 per gallon? Nationwide, gas prices passed that threshold in March of this year. That's right, March 2005. Until then, the average nationwide pump price for regular gas had never passed the $2 mark. Six">Don't Sweat Gas Prices - Forbes.com: "NEW YORK - Fun fact: A year ago, Exxon Mobil shares were trading 35% lower than they are today. Wal-Mart Stores' shares were trading 35% higher.

A coincidence? Perhaps. But it does tell us a lot about which way the nation's economy is going right now. Resources are shifting. To be sure, there may be other reasons playing into why Wal-Mart (nyse: WMT - news - people ) has fallen, but overall, investors are betting that consumers will be spending on expensive gasoline now, and expensive heating oil and natural gas this winter, instead of plasma TVs.

All we have to do is look at the consumer confidence numbers--the worst monthly plunge in 15 years, since 1990 when we were in the midst of a recession and the first Gulf War.

So, should you worry? I wouldn't. Not long term, at least. We've been here before, we'll be here again. And we'll survive.

Remember when gas prices passed $1 per gallon? Guess. (Don't read further until you've done that, because I'm going to give it away very soon. A hint, not so very long ago.) How about when they passed $2 per gallon?

Regular unleaded gasoline first passed the $1 mark in September 1979, according to the Department of Energy. Jimmy Carter was president, and two months later Americans were taken hostage at the U.S. Embassy in Tehran. The next November, Ronald Reagan was elected president because of all these issues. Still, by March 1986, we were back down below $1 per gallon, and we stayed there for three more years.

And $2 per gallon? Nationwide, gas prices passed that threshold in March of this year. That's right, March 2005. Until then, the average nationwide pump price for regular gas had never passed the $2 mark. Six"

Energy prices fall as supplies increase

Energy prices continued to fall Sept. 6 as oil and gas production ramped up in the Gulf of Mexico and Gulf Coast refineries resumed operation in the wake of Hurricane Katrina.
Markets also anticipated the release of crude and petroleum products stockpiled by the 26 members of the Paris-based International Energy Agency, in cooperation with the European Union. The two groups agreed Sept. 2 to supply 60 million bbl of crude and refined products to world markets over 30 days, "allowing market mechanisms to provide the most efficient method of directing the oil where it is needed," IEA officials said.

Additional supplies
The "initial response" of 2.1 million b/d will be "94% stockdraw, 3% demand restraint, and 3% increased indigenous production" said IEA officials on Sept. 7. The bulk of that contributio (52%) will be supplied by North America, with the US accounting for 44.2% and Canada for 4.6%.
The US Department of Energy earlier announced plans to sell 30 million bbl of crude from the Strategic Petroleum Reserve, with bids due by Sept. 9 and delivery dates to winners in October unless a buyer can take delivery earlier.
The proportion of the contribution from any single IEA member is based on that nation's oil consumption as a portion of the group's total oil consumption, officials said. Other major contributors will be Japan 12.2%, Germany 6%, South Korea 4.8%, France 4.6%, Italy 4.1%, the UK 3.6%, and Spain 3.5%.
The IEA stockdraw will be 1,289,000 b/d of crude and 683,000 b/d of products, including 369,000 b/d of gasoline, 276,000 b/d of middle distillates, and 38,000 b/d of fuel oil. "Outside the US, the largest stockdraw contribution will be 545,000 b/d of finished products from Europe, consisting of 317,000 b/d motor gasoline, 190,000 b/d middle distillates, and 38,000 b/d fuel oil," officials reported.

Meanwhile, the Venezuelan embassy in Washington said Sept. 7 that Petroleos de Venezuela SA (PDVSA) will supply more than 960,000 bbl of additional gasoline to the US in four shipments this month. That gasoline, taken from storage and diverted from other customers, will be sent to and distributed by PDVSA's US subsidiary Citgo Petroleum Corp. in addition to previously scheduled shipments of 1.2 million bbl in September. Venezuela is not a member of IEA.

Kuwait earlier pledged a $500 million aid package to the US to help deal with the devastation caused by the hurricane. That aid is to include "both humanitarian and petroleum supplies, in particular gasoline," officials said, but it first must be approved by a special session of Kuwait's parliament, now in summer recess.

Industry recovering
As of Sept. 6, the US Minerals Management Service said crews had not yet returned to 27 mobile rigs and 192 offshore platforms in the Gulf of Mexico. As a result, 870,374 b/d of oil and 4.16 bcfd of natural gas production remained shut in. That's equivalent to more than 58% of crude and 41.6% of the natural gas normally produced from the gulf. Production losses during the period of Aug. 26-Sept. 6 totaled 12.75 million bbl of crude and 67.6 bcf of natural gas.

Katrina was the fourth storm to disrupt oil and gas production in the gulf this year. Hurricane Dennis disrupted production of 5.29 million bbl of oil and 23.3 bcf of gas; Tropical Storm Cindy, 312,127 bbl of oil and 1.7 bcf of gas; and Hurricane Emily, 240,024 bbl of oil and 1.58 bcf of natural gas.

"The offshore rig industry actually emerged in fairly good shape with minor damage on several rigs and severe damage on six rigs" from Hurricane Katrina, said analysts at Jefferies & Co. Inc. "In all, it appears that roughly 16 rigs out of 132 active rigs (excluding platform rigs) in the gulf incurred some sort of notable damage as a result of the storm with as many as 6 likely to be total constructive losses."

Rowan Companies Inc.'s Rowan New Orleans jack up capsized. Diamond Offshore Drilling Inc.'s Ocean Warwick jack up also is likely a constructive loss, "as well as four platform rigs," analysts said. Transocean Inc.'s Deepwater Nautilus semisubmersible rig "incurred significant damage to its mooring system and subsea well control system" and "could be down at least 3 months," said Jefferies analysts.

The Louisiana Offshore Oil Port is now working at 75% of its maximum capacity, with two of three births open, officials reported. Utility workers said they would soon supply electrical power to LOOP's tank facility, giving the port access to the special crudes that refiners are requesting. Seven tankers are awaiting access to LOOP, and the port may be back to normal operation by Sept. 11, DOE officials reported.

DOE's Office of Electricity Delivery and Energy Reliability reported that of 10 Gulf coast refineries shut down by Katrina, three were in various stages of restarting by the afternoon of Sept. 6. A fourth, Motiva's 226,500 b/d refinery at Norco, La., sustained limited damage and was thought to be able to restart at midweek. Others still had no power or remained subject to damage assessment.

Energy prices seesaw as Katrina fools markets

Energy prices shot to new highs in early trading Aug. 29 after Katrina, a category 4 hurricane, ripped through the oil and natural gas producing area of the central Gulf of Mexico and came ashore before dawn east of New Orleans.

Energy prices had plummeted during the last trading session on Aug. 26 when a much weaker Katrina was threatening southeast Florida. Traders badly underestimated Katrina's ability to strengthen and swing west to threaten Gulf Coast production and refining.

The US Minerals Management Service's regional office in New Orleans reported only 12 production platforms and 9 drilling rigs in the Gulf of Mexico had been evacuated as of Aug. 26, with no production shut in at that time. However, offshore operators escalated the evacuation of crews and reduced production over the weekend as Katrina crossed Florida into the gulf, gathering strength as it moved west. By Aug. 28, the MMS regional office had relocated temporarily to its emergency facility in Houston as many residents evacuated low-lying New Orleans.

"Royal Dutch Shell PLC estimated 420,000 b/d of oil and 1.35 MMcfd of natural gas would be shut in at its central and eastern gulf facilities. ExxonMobil Corp. said it has ceased daily production of 3,000 bbl of oil and 50 MMcf of gas. Valero Energy Corp. evacuated all but a few workers at its 260,000 b/d St. Charles refinery on [Aug. 27]. ConocoPhillips shut its 247,000 b/d Alliance refinery; Murphy Oil Corp. shut down its 120,000 b/d Meraux, La., refinery; and ExxonMobil planned to shut down its 183,000 b/d refinery in Chalmette, La," said James K. Wicklund, an analyst in the Houston office of Banc of America Securities.

Other sources estimated as much as 1.5 million b/d of refining capacity may have been shut down by the storm just a week before the US Labor Day holiday that marks the official end of the peak summer driving season. Moreover, the Louisiana Offshore Oil Port, which takes in 11% of crude imports into the US, suspended marine operations at midday Aug. 27, although it was still making pipeline deliveries at that point.

"A much larger-than-anticipated drop in US gasoline inventories despite a larger-than-expected build in crude stocks helped buoy oil prices last week. An added concern could become that with the disruption to gulf production and refinery operations that US gasoline inventories might drop to below the critical 15 days on demand coverage," said Robert S. Morris, Banc of America Securities, New York.

Six major refineries with a combined crude processing capacity of 1.7 million b/d are located along the Mississippi River between Baton Rouge and New Orleans. "These refineries produce 775,000 b/d of motor gasoline and 440,000 b/d of distillate fuel oil. Refineries in Louisiana are a primary source of supply for the daily shipment of motor gasoline to the East Coast markets," said analysts at Petral Consulting Co., Houston.

Louisiana also has 30 major gas plants with a combined capacity of 18 bcfd. Damage to the electric power grid (generating plants, transmission lines, and substations) "is the most important source of damage to consider in evaluation of the impact of Hurricane Katrina. Refineries, ethylene plants, raw mix fractionators, and many gas plants cannot operate without electric power. Undoubtedly, repairs to the electric power systems in southeast Louisiana will have high priority, but repairs after a major storm may take a week or two to complete," analysts said. Damage to the power grid may mean that refinery production will be disrupted "for as little as a few days or as long as a week or two," they said.

The October contract for benchmark US light, sweet crude plummeted by $1.36 to $66.13/bbl Aug. 26, only to jump to a record $70.80/bbl in overnight electronic trading Aug. 29 on the New York Mercantile Exchange—the biggest one-time gain for a front-month contract in 29 months. The November contract fell by $1.30 to $66.89/bbl on Aug. 26 but was trading as high as $71.15/bbl by the morning of Aug. 29. West Texas Intermediate at Cushing, Okla., lost $1.16 to $66.14/bbl on the US spot market on Aug. 26, but no update was available.

Heating oil for September delivery dropped 3.9¢ to $1.84/gal on Aug. 26 but was up to $2.01/gal in the early Aug. 29 session. Gasoline for the same month first fell by 3.68¢ to $1.93/gal but recovered to a record high of $2.16/gal in the same two sessions.

The September natural gas contract increased by 2.2¢ to $9.79/MMbtu on Aug. 26, "propped up by a firm cash [spot] market and pre-weekend short-covering [of exposed sales contracts] and concerns that Hurricane Katrina could veer west and disrupt offshore natural gas production," said analysts at Enerfax Daily. It escalated as high as $12.07/MMbtu in early trade on Aug. 29.

"Given that the entire offshore Gulf of Mexico accounts for just under one-quarter of total US natural gas supply, the prospect of Katrina interrupting just a portion of this output provided an even greater uplift to natural gas prices relative to oil prices. However, we believe that the markets did not fully anticipate the prospect of Katrina making landfall further west of the Florida panhandle at the markets' close on Friday and consequently natural gas prices are likely to surge even higher starting out this week," Morris said.

On the Singapore futures market Aug. 29, crude prices for the first time escalated to more than $70 a barrel in overnight trading.

In London, the October contract for North Sea Brent crude fell by $1.40 to $64.87/bbl on Aug. 26. Gas oil for September lost $2 to $595.50/tonne at the end of last week.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes inched up by 1¢ to $59.76/bbl on Aug. 26. So far this year, OPEC's basket price has averaged $48.69/bbl.