Gasoline being rationed to retailers

Gasoline prices leaped nationwide Wednesday as key refineries and pipelines remained crippled by Hurricane Katrina, crimping supplies and leading to caps on the amount of fuel delivered to retailers.

The Bush administration agreed to release oil from emergency stockpiles to help Gulf Coast refiners hobbled by a loss of shipments due to Katrina. The administration also moved to temporarily ease some pollution standards on gasoline and diesel fuel to avert shortages. The decision to tap the Strategic Petroleum Reserve was an effort to keep production of gasoline and other fuels steady.

Crude futures prices fell but remained close to $69 a barrel.

Just how bad the situation becomes for motorists, who are facing pump prices in excess of $3 a gallon in a growing number of markets, depends on how quickly electricity can be restored to Gulf Coast pipelines and refineries, analysts said. Flooding may have left some important refinery equipment submerged and it will be days before a full damage assessment is completed, industry officials and analysts said.

Some rays of hope emerged Wednesday. The Colonial Pipeline Co. said it would restore partial service with help from diesel generators that will allow it to begin shipping gasoline, heating oil and jet fuel from Houston to markets up and down the East Coast. Similarly, the Louisiana Offshore Oil Port, through which 10 percent of all U.S. oil imports flow, said generators would enable it to gradually resume partial service.

A significant amount of oil and gas production in the Gulf of Mexico remains shut and reports of banged-up platforms and missing rigs continued to trickle in as companies conducted aerial inspections of offshore facilities.

Onshore, wholesale gasoline suppliers have begun capping the amount of fuel they sell to retailers in certain markets to make sure retailers do not take delivery of more fuel than they actually need. Analysts said that while shortages have been reported in a small number of markets, they do not believe the problem is widespread and they cautioned motorists not to top off tanks out of fear.

With retail gasoline prices surging, BP PLC said in an e-mail to clients that it is making "pricing decisions with prudence and restraint in the wake of this natural disaster."

Light sweet crude for October delivery on the New York Mercantile Exchange fell 87 cents to settle at $68.94 a barrel, down from an overnight high of $70.65. On Tuesday, oil futures settled at $69.81, the highest closing price on Nymex since trading began in 1983, although still below the inflation-adjusted high of about $90 a barrel that was set in 1980.

October gasoline futures surged as high as $2.92 a gallon on Nymex and settled at $2.6145 per gallon, an increase of 14 cents. That is 35 percent higher than they were on Friday.

"There's too much uncertainty," said Kilduff said.

While the details were being worked out about how much oil would be loaned from the U.S. Strategic Petroleum Reserve -- and which refiners would receive it -- European nations began considering the release of their own government-controlled stockpiles of gasoline and heating oil, according to officials at the Paris-based International Energy Agency. The officials demanded anonymity because the consultations were confidential.

"We're the highest (wholesale) price market in the world right now," said Lawrence J. Goldstein, president of the New York-based nonprofit Petroleum Industry Research Foundation. "We're going to attract a lot of supply here."

In another attempt to ease the crunch on motor fuel supplies, the Environmental Protection Agency said it would temporarily allow retailers nationwide to sell gasoline and diesel that does not meet stringent summer air-quality standards.

Even before Katrina plowed through the Gulf Coast, oil producers and refiners had been struggling to meet rising demand around the globe, particularly in the U.S. and China. Energy markets have been on edge for about two years because the amount of excess oil production capacity worldwide is only about 1.5 million barrels a day, or less than 2 percent of demand.

"The hurricane has made a bad situation worse," said oil analyst Fadel Gheit at Oppenheimer & Co. in New York.

Eight Gulf refineries remain out of service, and will be for days if not weeks, according to analysts, though most of their owners have not yet publicly announced the extent of any damage.

It could take a week to 10 days before refineries and pipelines will be able to draw power from the grid, John Zamanek, vice president of Entergy Corp. told CNBC.

The hobbling of a pipeline that carries crude oil from the Gulf of Mexico to the Midwest has increased the need for Canadian imports, industry officials said. And the shutdown of pipelines that carry various fuels to markets on the East Coast means that more gasoline and diesel will have to be shipped by barge and by truck, according to John Eichberger, director of motor fuels at the National Association of Convenience Stores.

The U.S. Minerals Management Service said Wednesday that 91 percent of the Gulf of Mexico's oil output was out of service, with more than 6 million barrels of production lost since Friday. The agency said 83 percent of natural gas output was shut down, resulting in a loss of 34.2 billion cubic feet of lost production since Friday.

While the loss of oil is significant, Energyintel analyst Tom Wallin said Katrina would likely have a more serious impact on the nation's supply of natural gas.

"Crude oil production could be replaced by a release of barrels from the U.S. strategic reserve," he said. "There is no such safety valve for natural gas."

Natural gas futures fell 35.9 cents to $11.30 per 1,000 cubic feet on Nymex. That is almost double the price from a year ago.

Heating oil futures slipped 2.29 cents to $2.053 per gallon.