Gas Price Gouging Hits Hurricane States

Sept. 12, 2008— -- As Hurricane Ike barrels down on Texas, the impact is being felt in other parts of the country as the oil industry comes to a near halt and reports of price gouging start to spread.

Fears of gas shortages are leading to exploitation in some parts of the Southeast, where some stations are reported to be charging as much as $6 a gallon for gas.

In North Carolina, Gov. Mike Easley has declared a state of "abnormal market disruption" and signed an order allowing the attorney general to enforce the state's anti-gouging law. In South Carolina, Attorney General Henry McMaster invoked a similar law for his state, and Kentucky Gov. Steve Beshear declared a state of emergency.

"Fear of price gouging is bad in the state right now," Mark Plowden, communications director for the South Carolina attorney general told ABC News. "Public panic can cause a run on the pump, creating more panic, so we are trying to control the situation."

His office has fielded hundreds of phone calls, and many other calls have been received by county law enforcement offices. Plowden added that the receptionist is fielding "a phone call every eight seconds on this topic."

"People have gone as far as calling 911 to report that gas is expensive," he said.

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South Carolina passed its law on price gouging in response to Hurricanes Katrina and Rita. Those hurricanes severely disrupted the oil pipeline that supplied oil to the area.

In the Columbia, S.C., area, some stations have been reportedly charging more than $5 with at least one report of gas selling for $5.59. In Tallahassee, Fla., there was a report of gas at $6 a gallon. Prices have also spiked in Kentucky and Virginia with reports of gas priced at $4.50 and $4.79, respectively.

In New Bern, N.C., one station raised its prices today from $3.98 a gallon to $4.98.

Gas in the mid-Atlantic and southern-Atlantic states was averaging just $3.60 last week, according to the Department of Energy.

Some analysts say that there are other factors at work, which validate price increases.

"In this situation the price spike is totally justified," said Phil Flynn of Alaron Trading Corporation. "You've got supplies at the lowest level they've been in many years and at the same time you have a surge in demand ahead of a storm."

Making matters worse, 97 percent of oil operations in the Gulf of Mexico have been temporarily halted. On average, more than 1.3 million barrels a day are produced in the Gulf. Natural gas production has also come to a near halt, with 93 percent of those facilities shut down, according to the Department of Energy.

"You already have supplies tighter because of Gustav," said John Kingston, director of oil for Platts News & Pricing, an industry research service. "Now real fears, not only shut down, but some refiners could flood and cause significant delays in refiners being damaged or flooded or power out for a week."

But even the oil that is already out of the ground is no longer being turned into gasoline. So far, 13 refineries in Texas have shut down or slowed down operations from Port Arthur to Houston to Corpus Christi.

These refineries can handle 3.6 million barrels a day of crude oil, which represents 75 percent of the total refining capacity in Texas. The state leads the nation in refining, representing more than one-fourth of the country's total refining capacity.

There are also going to be major delays in moving oil from one location to another. Major crude oil pipelines have been shut down throughout Texas and Louisiana. These pipelines deliver oil and gasoline to the Gulf Coast region as well as up and down the Eastern seaboard.

That means less oil, and gasoline will be available to gas stations, which in turn means reduced supplies. That can lead to higher prices, especially if drivers, worried about possible shortages, start filling up.

The explanation for the increases at the pump can be blamed on higher wholesale gasoline prices in the areas directly affected by Hurricane Ike. On Thursday, wholesale gasoline rose nearly $1.50 -- more than 40 percent -- in one day, the biggest one-day spike since the Arab oil embargo in 1973, said John Kilduff of MF Global. If those wholesale prices were to hold, Kilduff said the price at the pump could rise to $5.25.

Oil settled at $101.18, up 31 cents, at the end of trading today. Earlier in the day during trading, oil sold for $99.99. The last time oil traded below $100 was May 2, and the time oil settled below the nice, round figure of $100 was March 4.

"It does seem counter-intuitive to consumers, but you really can't consume crude oil," said Mary Novak, energy analyst at Global Insight. The only thing you can consume is gasoline.

Gasoline inventories in the U.S. are at an eight-year low, and a major disruption to the nation's gasoline supply could send prices soaring immediately, even if oil prices continue to drop.

"Oil prices and gas prices used to be much more in lock step and they separated [in the] last couple of years," said Jeff Leonard of the National Association of Convenience Stores. "They reflect each other, think biggest schism seen."

Ben Brockwell, director of data, pricing and information services for the Oil Price Information Service, told The Associated Press, "The path of the storm has put the entire supply chain under stress from the refinery level all the way to the retail station level. Hopefully, it's a temporary phenomenon, but we won't know until next week."