Rob Grunewald - Associate Economist
Published November 1, 2005 | November 2005 issue
While the Ninth District was far from the immediate destruction of Hurricanes Katrina and Rita, consumers here quickly saw the effect on prices at the gas pump. Just after Katrina, the Energy Information Agency (EIA) reported that between Aug. 29 and Sept. 5, the U.S. average price for regular gasoline rose 46 cents to $3.07 per gallon, the largest weekly hike in prices on record. Nevertheless, the price was still shy of the record inflation-adjusted price for gasoline in 1981, $3.12 per gallon.
Hurricane Katrina initially affected 25 percent of U.S. crude oil production, and between 10 percent and 15 percent of refinery capacity was shut down for the first few days following the storm. The combined effects of the two hurricanes dropped crude oil inputs into refineries down to an average of 11.7 million barrels per day during the week ended Sept. 30, the lowest average since March 1987.
The destruction in the Gulf didn't affect gasoline prices in all areas of the country equally. Two major pipelines that carry gasoline from the Gulf Coast to Virginia and New Jersey were shut down for a few days following Katrina, contributing to shortages on the East Coast—some gas stations ran dry—and the highest prices in the country at $3.20 per gallon. Following Rita, similar supply disruptions brought U.S. average gas prices back up to $2.93 per gallon.
District gasoline prices were also affected by the oil production shock in the Gulf, but to a lesser extent than in other parts of the country since Northern refineries have easier access to Canadian oil. While gas prices increased in district states following Katrina and Rita, on average they remained lower than the national average. For example, during September, Minnesota gasoline prices were on average about 20 cents lower than the national average.
U.S. diesel fuel prices reached inflation-adjusted highs in September ($2.82 per gallon) and will likely finish even higher in October. Gasoline markets have benefited from increased imports to offset some of the domestic supply disruption, whereas diesel fuel imports were much less. Reports of fuel surcharges for shipping are common.
About 20 percent of U.S. natural gas production resides in the Gulf. When Katrina and Rita swept through the region, production was halted, and several operations reported damage requiring weeks and months to repair. As a result, U.S. natural gas well head prices that were already climbing during August due to hot weather in Southern states jumped to over $13 per million British thermal units (MMBtu) by the end of September. (In June, prices were just over $6 per MMBtu.)
Unlike oil and gasoline, for which imports have helped replace some of the curtailed domestic supply, natural gas imports are limited. With just 40 percent of normal natural gas in production along the Gulf Coast as of early October, the downturn in supply will result in higher heating prices this winter. The EIA has predicted that heating expenditure in parts of the Midwest could be as high as 60 percent above a year ago.