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Oil supply disruption threatens fuel prices

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Oil supply disruption threatens fuel prices

By Sheila McNulty in Houston

Published: August 31 2008 19:43 | Last updated: August 31 2008 19:43

Oil companies stepped up efforts to shut production in the Gulf of Mexico on Sunday as Hurricane Gustav tore into the US’s largest oil and natural gas producing region.

A total of 77 per cent of oil production and 37 per cent of natural gas production in the Gulf had been reported shut, yet that figure was expected to climb rapidly as the hurricane moved closer to oil platforms and rigs.

Royal Dutch Shell said about 10 per cent of its stations were out of fuel as of Saturday morning in New Orleans, Baton Rouge and surrounding areas. It would continue delivering petrol to keep stations open as long as possible, but cautioned that its employees and operators would need to be evacuated.

Valero, the biggest US refiner, said it had shut one Gulf coast refinery and was operating three others at reduced rates. It had closed 15 of the 30-40 petrol stations it operates in Louisiana because staff there had been evacuated. But it said it would continue supplying fuel to other stations along evacuation routes as long as possible.

ExxonMobil and others also reported refinery shutdowns. The last big hurricanes to hit the Gulf coast, where 20 per cent of the US’s oil and gas is produced, were Hurricanes Katrina and Rita in 2005. More than 100 production platforms were destroyed in those storms, rigs were toppled and refineries flooded, so that, even a year later, 15 per cent of daily oil production in the Gulf and 11 per cent of daily gas production remained off line.

The oil companies improved infrastructure on rebuilding, increasing anchoring and elevating control systems and other vital equipment. Yet, three years later, production has not recovered to pre-Katrina levels. The Gulf produces 1.3m barrels per day of oil, down from 1.6m b/d then. Tight global demand for oil is likely to make any long-term loss of Gulf production worse this time round.

“With both crude and total oil product inventories running significantly lower than they were when either Katrina or Rita sidelined Gulf oil production, both oil and gasoline prices are more exposed to potential storm-related supply disruptions,’’ said Jeff Rubin, chief economist at CIBC world markets, the Canadian investment bank.

“A comparable hit to production could easily send gasoline prices to record highs, with pump prices rising to $5 per gallon,’’ Mr Rubin said.

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