Hurricane Ike: Gas Prices Jump

On Labor Day weekend, I warned that gas prices might jump due to Hurricane Gustav, because most of the Gulf's offshore oil production had shut down.

Instead, prices dropped; analysts credited the "recent decline in oil prices and gas futures." Gas prices usually drop in September (the end of the summer driving season). However, in 2005, Katrina seriously disrupted that model.

Hurricane Ike, on the other hand, has caused a spike at the wholesale and retail level, even before making landfall. That's because Texas refineries have a larger impact on supply (and thus price) than offshore drilling. Crude prices, however, continue to drop; prices Friday were less than $101 per barrel.

Hurricane Ike is projected to hit near Galveston, an island off the coast of Texas. It's near Houston, and the Houston region is "home to about one-fifth of U.S. refining capacity, and the site of a major fuel and grain distribution channel."

Here's what's happening in wholesale prices: panic or rational?

• Tuesday, less than $3.00 a gallon, (Gulf Coast wholesale market)
• Wednesday, $3.25 a gallon (Gulf Coast wholesale market)
• Thursday afternoon, $4.75+ a gallon (Gulf Coast wholesale market)
• Friday morning, $4.85 a gallon -- "uncharted territory" -- (Gulf Coast wholesale market)

On Thursday, the U.S. Energy Department "reported a larger-than-expected drop in crude and gasoline inventories and OPEC decided to cut excess production by about a half-million barrels a day."

Gas Pricing Explained
There are four components to the price of gasoline at the pump: crude oil price, refining costs, distribution costs (that includes marketing and ads), and taxes.

Taxes are fixed, at least in the short term. Refining costs don't vary widely from month-to-month, although they may go up at an individual refinery, on a per gallon basis, if the volume of incoming crude declines. However, the number of refineries in production affects the total supply of gasoline available to US gasoline stations.

Distribution costs are nominally affected by the cost of diesel (the trucks that deliver to the gasoline station). Advertising/marketing are discretionary sums that can vary according to executive whim.

But the largest -- and most volatile -- portion of the price is crude.

• Gas Price Drop Does Not Match Election Year Pattern (November 2006)
• About The Price At The Pump (October 2006)