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$3 Gas Is Likely in a Matter of Days

Special to The Times

Ripples from Hurricane Katrina could deliver $3-a-gallon gasoline by Labor Day weekend to California and across the nation as most of the Gulf Coast petroleum industry remained closed Tuesday, pushing wholesale energy prices to new highs.

Fearful of shortages, traders in New York furiously bid up prices of crude oil, gasoline, natural gas and heating oil as grim images poured in of severe flooding and other extensive damage to the oil-rich area.

In the Gulf Coast region, which accounts for about one-quarter of the nation’s production of oil and natural gas, 95% of the oil output and 88% of the natural-gas production remained shut down, according to the U.S. Minerals Management Service, an arm of the Interior Department. Several gasoline refineries and pipelines were still out of commission.

The stunning surge in futures prices will soon spread across the nation, analysts said. That includes California, where prices at gasoline pumps -- already averaging a record high of nearly $2.81 a gallon for self-serve regular -- should keep rising in the wake of Katrina’s devastation, they said.

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“The storm is going to cause gasoline prices in California to go up,” said David Hackett, president of Stillwater Associates, an oil consulting firm in Irvine.

California doesn’t import much gasoline from the East because of strict air-quality standards. Even so, the state’s prices are heavily influenced by swings in prices for oil and gasoline futures contracts traded on commodities markets, he said.

And there was speculation that energy companies and traders might export California fuel to the Gulf states to cash in on prices that for once were higher than those in the Golden State.

Crude oil accounts for about half the cost of gasoline, and the U.S. benchmark grade of light crude for October delivery on the New York Mercantile Exchange surged as high as $70.90 a barrel before closing at $69.81, up $2.61.

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It was the highest closing price since oil futures began trading on the Nymex in 1983, breaking the previous record of $67.49 a barrel reached Thursday. If adjusted for inflation, prices are still below the $90-a-barrel level reached in 1980-81.

Gasoline for September delivery on the Nymex skyrocketed 41.39 cents, or 20%, to $2.475 a gallon. The rally was so frenzied that, after prices had jumped 25 cents a gallon, the exchange halted trading for five minutes to let the market cool. But after trading resumed, prices shot even higher.

The effect of those soaring prices was quickly felt in regional wholesale markets where fuel wholesalers and service stations buy supplies for immediate delivery. Along the Gulf Coast itself, some gasoline was being priced as high as $2.85 a gallon, while prices reached $2.53 to $2.60 a gallon in California’s unregulated spot market, according to Oil Price Information Service, an energy research firm.

Pump prices paid by Californians typically are at least 60 cents a gallon more than wholesale prices to reflect taxes, transportation and the dealer’s profit, meaning "$3 gasoline is pretty much a certainty” at many gas stations over the Labor Day weekend, said Denton Cinquegrana, the firm’s West Coast editor. Prices are less likely to fall after the holiday, when demand for gasoline typically eases.

On Tuesday, the average price for self-serve regular in California had climbed only slightly, to $2.809 a gallon compared with $2.801 on Monday, but that was still a record high, according to AAA.

Motorist Israel Solis, buying $2.89-a-gallon gasoline Tuesday night at a Chevron station in Santa Monica, was dismayed at the prospect of even more costly fuel. Gas sticker shock had already forced cancellation of a Labor Day trip to visit family in San Jose, the 29-year-old Marina del Rey resident said.

“It’s sad. We’re just going to have to pay it. What can you do?” said Solis, who said his wife had called before he pumped to remind him not to splurge on a more expensive grade.

The unprecedented prices could add to the record profits that many oil companies have enjoyed over the last 18 months, at least in regions unaffected by the powerful storm. Stock prices for several of the oil companies also rose Tuesday even as their problems in the Gulf mounted.

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But the companies also face as-yet uncalculated repair bills to fix their production, refining and distribution facilities. In addition, many of the major oil companies, including Shell Oil Co. and Valero Energy Corp., have begun rationing how much gasoline they provide wholesalers and dealers while their Gulf Coast operations recover.

Some politicians have urged President Bush to immediately release some of the 700 million gallons of oil in the U.S. Strategic Petroleum Reserve so that refiners can be confident of having enough supplies to make gasoline and other fuels. The White House has indicated that it would be willing to lend oil to companies, as it did after Hurricane Ivan nearly a year ago, but so far hasn’t committed to simply releasing oil to the market.

When the hurricane struck Monday, energy prices jumped at first but then backed off somewhat, as Katrina moved inland and traders took some of their profits, believing that severe damage had been avoided.

But as Tuesday unfolded and energy company crews boarded airplanes and helicopters to get their first aerial views, the enormous extent of the hurricane’s destruction became more apparent. Reports quickly surfaced about flooded refineries, closed pipelines and production platforms that had torn lose from their moorings.

Diamond Offshore Drilling Inc., for example, said its Ocean Warwick drilling rig -- which normally floats 12 miles off the coast of Louisiana -- was found miles away with “significant damage” at Dauphin Island, off the coast of Alabama. Murphy Oil Corp. said its New Orleans refinery was inaccessible because of flooding.

There also was topside damage to a big platform called Mars operated by Shell, according to a message to employees from Shell President John Hofmeister. Shell was sending out crews to retrieve two drilling rigs that drifted off location, with hopes of towing the rigs to shallow waters to make repairs, he said.

But as crews fanned out, they struggled to exchange information with company managers because electricity and phone lines were mostly out.

“There’s just no phone service in or out of this impacted area, so we’re just getting sporadic communication from our employees who have evacuated,” said Chevron Corp. spokesman Mickey Driver.

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Valero Energy began flying electrical workers and other repair personnel to its refinery in St. Charles, La., but it will still take one to two weeks for the facility to reopen, said spokeswoman Mary Rose Brown.

Other energy companies were still in the dark. ConocoPhillips executives said they knew almost nothing about three oil platforms that had been evacuated or its refinery in Belle Chasse, La., near New Orleans.

There was some good news. Hugh Depland, a spokesman for British oil giant BP, said aerial surveillance showed that the company’s 59 platforms in the region -- six of which are deepwater rigs -- were in good condition.

Times staff writer Peltz reported from Los Angeles and special correspondent Calvo from Houston. Staff writer Alex Pham contributed to this report.


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