Stronger Gustav could mean higher gas prices

The respite for consumers at the gasoline pump may come to an abrupt end if Tropical Storm Gustav slams into the petroleum-rich Gulf Coast and its numerous refineries, just as the Labor Day weekend arrives.

Gustav was downgraded from a hurricane to a tropical storm Wednesday after moving over Haiti, but forecasters expect it to regain strength and move into the Gulf of Mexico in a few days.

Oil companies with operations in the gulf began removing nonessential workers from rigs, platforms and other facilities Wednesday morning, and refiners were preparing, too.

There have been some minor production cuts, but so far output has largely been unaffected.

Still, oil prices jumped more than $2 to above $118 a barrel, rising for a third day as Gustav spun toward the gulf. Its approach is just days before the three-year anniversary of Hurricane Katrina, which along with Hurricane Rita devastated the region's energy infrastructure.

Kenneth Medlock, an energy expert and adjunct economics professor at Rice University, said a run-up in gasoline prices as a storm approaches is not uncommon, prompted in part by fears of potential supply shortages in the storm's wake.

“Station owners have to value what's in their tanks based on what the replacement costs are – what's it going to cost them to buy off the rack, basically,” Medlock said. “So when that price goes up, they're going to start raising the price at the pump, although it's usually a short-term thing.”

Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates, said any refinery shutdowns would likely lead to a gas price spike.

Those prices have dropped for seven straight weeks, and the national average of $3.686 per gallon hasn't been as low in four months.

“There's a strong chance that by Friday we could see some fairly significant pump price increases,” Ritterbusch said.

Business weather research firm Planalytics said Wednesday that up to 80 percent of the gulf's oil and gas production could be shut down as a precaution if Gustav enters the region as a major storm.

Ben Brockwell, director of data, pricing and information services for the Oil Price Information Service in Wall, N.J., said a jump in prices is not unexpected as Gustav approaches, but he doesn't foresee a long-term spike unless the storm causes major damage.

Brockwell said the oil industry learned valuable lessons from Katrina and Rita and has made changes that should expedite its recovery after the next big blow.

Companies have spent hundreds of million dollars in the past few years to improve their operations. Platform moorings are stronger; pipelines are deeper; backup power is in greater supply.

For refiners, the two biggest challenges after Katrina and Rita passed were power disruptions and flooding. As such, some refiners have raised critical equipment above flood levels and enhanced plans to get backup power as quickly as possible.