Could Hurricane Sandy Shoot Gas Prices Over $5 a Gallon?

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

There are a lot of companies looking to address the problems with our current energy infrastructure. This means there are several opportunities for investors to be part of what could be a $210 billion overhaul of the current system. While there is a wide range of potential winners in this space, we at the Motley Fool keep a sharp eye on this sector, and our analysts have found The Only Energy Stock You'll Ever Need. We have put together a free report for investors so you can get in on this great opportunity. To get your free copy, simply click here

Fool contributor Tyler Crowe has no positions in the stocks mentioned above. You can follow him at Fool.com under the handle TMFDirtyBird, on Google +, or on Twitter @TylerCroweFool

The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (12) | Recommend This Article (22)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 30, 2012, at 5:10 PM, TMFmd19 wrote:

    Interesting analysis. Great job!

  • Report this Comment On October 30, 2012, at 5:45 PM, henjo wrote:

    Actually, gas prices should go down, because of markedly less usage. We are being gouged anyhow, with the wholesale price over a dollar less than the retail price. I don't understand why NOBODY ever investigates just who is pocketing the huge windfall.

  • Report this Comment On October 30, 2012, at 6:19 PM, bruce412 wrote:

    I heard the same thing. Because the demand for gas is down,this is going to help offset the problems at the refineries. There were actually only 3 refineries involved here and one of the bigger ones that supplies a larger percentage of gas to the effected area,Sunoco in Philadelphia, sustained only minor damage. This being said, that powers that be will find a way around this to jack up the prices.

  • Report this Comment On October 30, 2012, at 7:42 PM, wjcoffman wrote:

    Dropped 15cents over the last 2 days in the Deep South, hurricane alley's front door region. It will not make any significant move upward until after the election, even if every refinery on the east coast was reduced to rubble.

  • Report this Comment On October 30, 2012, at 7:53 PM, obga18 wrote:

    how is gas so high anyway when the cost of a barrel is under 100$? wasnt it a few years ago 4$ = 140$ a barrel? its a joke thats what it is...

  • Report this Comment On October 30, 2012, at 8:00 PM, mikecart1 wrote:

    Hurricanes usually cause gas prices to drop. The day gas prices are above $5 gallon is the day there are a lot of other things to talk about lol.

  • Report this Comment On October 30, 2012, at 8:13 PM, jordanwi wrote:

    Big deal. Canadians are already paying that. And times are good.

  • Report this Comment On October 30, 2012, at 8:48 PM, henjo wrote:

    Canadian's buy imperial gallons. 5 qts to the gallon.

  • Report this Comment On October 30, 2012, at 9:13 PM, MeTwit wrote:

    Oil companies love these big weather events. They re every happy to push prices another dollar per gallon up even when their costs are hardly affected. And whether their costs are affected or not, it is like the effect never goes away. You can trace the the permanent jump over $2 and $3 per gallon mark to Katrina ... and from since, it is as if Katrina became permanent. Now other weather vagaries that have little effect on oil processing costs are ever used to build up on the hump katrina created ... that is long after even those who lost family mambers already found their new norm. You don't have to rob by the gun when you are an oil company!

  • Report this Comment On October 30, 2012, at 9:49 PM, dfigures wrote:

    I think every state effected by the hurricane has gouging laws except MD which wasn't horribly effected so we may not see higher prices in the region at all...

  • Report this Comment On October 30, 2012, at 10:45 PM, semieng wrote:

    @ henjo

    I live in Vermont and visit Canada frequently. They don't sell their gasoline by the gallon, but by the liter.

    The price is over $5 per US gallon when converted to a per US gallon price.

  • Report this Comment On October 31, 2012, at 12:42 AM, swiver wrote:

    Its 3.22 a diddly-UG gallon in Houston right now. Beer is 6 bucks a pint. Its about 8 bux an imperial gallon in UK. Why are you moanin? And don't emigrate to Houston because you think we dont have hurricanes down here. - we dont need any more moaners. I went to california once and came right back to the Lone Star state because their prices were higher than in UK, and they all talked funny.

    You are not being gouged because you think petrol should be 32c a gallon like it was in 1978. in the O&G industry bust our tails doing marvelous enginering to bring people petrol, and all you moan about is fracking. Mabye you can moan about windmills killing birds, or you dont want windmills offshore because the spoil the view.

    Next time you fill up you SUV with PETROL, think about no wanting a refinery in your state.

    Investing in future energy production costs $. To provide heated homes, sufficent petrol for you and your overly large cars and pick-up trucks, and all those damn 10-wheelers that clog up the roads when their good could go chaeper by rail, just step back and think. I lighta would go out

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