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The Katrina factor and energy prices

The prospect of damage to oil installations could send the price of gasoline to $3 a gallon.

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Energy markets, already strained by robust demand and tight refining capacity in the United States, are now being roiled by a new force: the Katrina factor.

One of the largest hurricanes in US history is already raising energy costs. By midday Tuesday, the wholesale price of gasoline in the futures market was $2.37 a gallon, which would indicate a retail price above $3. A barrel of oil had soared to more than $70, almost $4 more than two days ago. Home heating oil was up about 20 cents a gallon.

How long prices will remain this high depends on how much damage has been done to the energy installations located in and around Katrina's landfall. Some 21 percent of the nation's natural gas originates under the Gulf, and 30 percent of domestic crude-oil production occurs in the region (accounting for 7 percent of total US oil supplies). To alleviate any shortages of crude oil caused by damage to the platforms supplying Gulf Coast refineries, the Bush administration is expected to open the spigot to the Strategic Petroleum Reserve.

Even seasoned observers were stunned by the sharply rising prices on the futures markets. With 10 percent of America's refining capacity shut down by the storm, and another 10 percent affected, the markets are moving on very little information, says John Felmy, chief economist at the American Petroleum Institute. "Right now, the short-term markets are going a little crazy," he says. "If there is little damage, they can reverse themselves."

In coming days, government and industry officials will inspect the maze of pipelines that moves oil and gas onshore, as well as the platforms where oil is unloaded. Government inspectors also have to check every oil rig for safety before crews can return. The industry itself, counseling consumers to use energy wisely, says it could be several days until the extent of the damage is known.

"This is a severe but temporary situation," says John Lichtblau, chairman of the Petroleum Industry Research Foundation in New York. "Repairs can be done."

Many energy analysts are counseling consumers to remain calm. Despite the importance of the Gulf refineries, plenty of gasoline is available, they note. And it's only days until Labor Day, considered the end of the peak gasoline season.

"There are adequate supplies relative to demand," says Mark Routt, an analyst at Energy Security Analysis Inc. in Wakefield, Mass. "There are 19 days of gasoline relative to demand."

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