Much of the East Coast closed down in anticipation of the severe weather. This shut down also included two-thirds of all oil refineries in the east coast -- and that could mean a spike in prices if operations can't get up and running after the storm.
Jump into the Way-Back Machine...
...all the way back to the beginning of October. In California, gasoline prices spiked to around $4.60 a gallon. Why? Several Minor disruptions at refineries throughout the state all happened within a week of each other. Chevron (NYSE: CVX ) was rebuilding after a fire at one of their refineries in August and shutdown of one of their pipelines, ExxonMobil (NYSE: XOM ) lost power the previous week and was starting up operations again, and Conoco Phillips (NYSE: COP ) shut down two refineries for scheduled maintenance.
Each individual event should have come and gone without much fanfare, but together, they represent 23.4% of refinery capacity in California -- and a market panic ensued. Valero Energy (NYSE: VLO ) stopped selling gasoline on the wholesale market because, according to company spokesman Bill Day, of those refining issues. Some gas stations in the state stopped buying gasoline because the price on the wholesale market was too much.
So, what does this have to do with Hurricane Sandy? Simply put, there is a chance we will be in the same situation about a week from now.
I don't want to sound like a preacher of doom, because this is speculative. But here are the important facts you should know.
- Before the Hurricane hit the East Coast, The east coast Petroleum Administration for Defense District (PADD 1) had a reserve of about 48 million barrels of gasoline. These numbers are only slightly higher than the low for the year, which was 45 million three weeks ago.
- Prior to the storm, Phillips 66 (NYSE: PSX ) , Hess (NYSE: HES ) , and PBF Energy all announced the shutdown of East Coast operations in anticipation of the hurricane. These three companies represent 58% of all oil refining capacity the PADD 1 district. It is also important to note that all of these shutdowns took place in New Jersey, Pennsylvania, and Delaware. These three states are the most northern refineries in the Eastern United States.
- If there is no damage to the facilities, we can assume these refineries will be up and running again in a similar amount of time it took the ones out in California (about one week).
With such low inventories in the East Coast already, it is possible that we could see a huge spike in gas prices over the next couple of weeks. The refineries that have remained open throughout the storm will more than likely be working at full capacity to try to keep up with demand. Furthermore, with the all of the remaining refining capacity below Philadelphia, gas will need to travel longer distances to get to its final destination. That increased travel distance only results in a higher cost at the pump. There is the chance, though, that some of the refineries in Canada will be able to fill some of that void.
What a Fool believes
As much as it might hurt to pay $5 a gallon at the pump for a while; it probably will not be long term. Once refineries are up and running, expect those numbers to ease their way back down to where they are today. With oil & gas production levels in the U.S. at their highest since 1997, it is possible that gas prices could be lower in six months than they are now.
More importantly, this should be a wake-up call to Americans. Even though American energy self-sufficiency is at its highest in two decades, we are still subject to a delicate infrastructure that can be knocked out by Mother Nature. In order for North America to be energy independent, we need to focus on both the supply and the distribution of energy.
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