You’re likely going to pay more at the gas pump, and for that, you can thank Hurricane Ida’s landfall on the Gulf coast.
The irony is that the rising cost of fuel comes hand-in-glove with a drop in oil prices.
Prices for reformulated gasoline were recently up 4.17 cents at $2.316 per gallon of the CME futures exchange, according to data from Bloomberg. Meanwhile, the cost of light sweet crude fell by 39 cents to $68.41 a barrel.
Normally, one would expect the price of oil and gasoline to rise and fall together as crude is the feedstock for gasoline.
Ida Upends Oil Market’s Business as Usual
But it doesn’t necessarily happen that way when there is a monster hurricane in the Gulf of Mexico.
The issue is that the Gulf coast is home to some of America’s largest oil refineries, and the hurricane’s ferocious winds make it near impossible to operate the facilities. The oil companies and refineries typically shut down production during such times, as they did this time with Ida. That makes sense, given that more than one million people in the area of landfall are now without power.
The cut in production of gas means three things.
- First, people will still want to buy gasoline to commute to work, but the refineries won’t be making any gas during the storm. A lower supply of gas with essentially unchanged demand will help left fuel prices.
- Second, refineries in the affected area will not be buying oil to make into gasoline. That means there will be a drop in demand for oil. Part of that will offset the reduced supply from oil wells that got shut down during the hurricane’s approach. This slight offset helps explain why the percentage decrease in oil prices was modest compared to the proportionate increase in gasoline prices.
- Third, these hurricane-induced price moves likely will reverse as the storm dissipates. At that point refineries will start operating once again, depending on the need for repairs.
How fast the oil market gets back to normal will essentially come down to how much damage the oil facilities suffer.
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