Katrina Sends Oil Prices Soaring

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Hurricane Katrina is driving oil prices higher amid concerns over the storm's potential to damage rigs in the Gulf of Mexico.

RENEE MONTAGNE, host:

Hurricane Katrina has just made landfall on the Louisiana coast. The huge storm threatens New Orleans. The threat is not only of a storm surge swamping the city, but also to the nation's oil supply. Louisiana hosts a large number of refineries. Oil production companies have evacuated rigs in the Gulf of Mexico. The threat to an already tight oil supply market has caused the price of crude to rise on oil markets. Joining me now is NPR's economics correspondent Jim Zarroli.

And, Jim, what's the latest from the oil markets as traders digest the potential implication of Hurricane Katrina?

JIM ZARROLI reporting:

Well, oil prices hit more than $70 a barrel as the hurricane began to approach the mainland. This was, of course, a record. Later, after the storm was downgraded, it--prices fell back a bit, under $70. I think they're just a little over $68 a barrel now. We also saw a big spike in home heating oil and gasoline futures. Home heating oil prices rose above $2 for the first time ever. So we're seeing some record prices.

MONTAGNE: Now oil production companies have closed lots of refineries in Louisiana in the past. How important are they to the nation's supply of gas?

ZARROLI: Oh, very, very important. And this comes at a time when refining capacity is already in very short supply in the United States. Any disruption at all in refining capacity can threaten oil prices quite a bit. Traders are very nervous about the situation, so this is really the worst-case scenario for them. If there's significant damage to oil refineries, it could cause a lot of problems.

MONTAGNE: And the refineries are important, right? Even if there's plenty of oil, they've--it's got to be refined?

ZARROLI: Right, exactly. Yeah...

MONTAGNE: Yeah--go ahead.

ZARROLI: No. No, exactly. No matter how much oil we have in--no matter what oil supplies are, there has been a shortage of oil refining capacity for a long time.

MONTAGNE: Of course, we all know gas prices at the pump have risen sharply in the last few weeks. What about after this hurricane, are they going to go even higher?

ZARROLI: They could. I mean, the real big question is going to be: What kind of damage, if any, there is--ar--is to the refining capacity in that area. And that's something we just can't know right now. You can bet that a lot of traders are watching the situation very carefully.

MONTAGNE: And another big component to the nation's energy sector is natural gas. How are prices of natural gas affected, if they are, as of this morning?

ZARROLI: They're also going up. Really, there's so much uncertainty at this point and there's so much nervousness on the part of traders. I mean, I think people just don't know what to expect. One of the questions right now that people are asking is what the federal government will do. One of the options open to the Bush administration to release some oil from the Strategic Petroleum Reserves. That's clearly an option for them. That might calm the markets down a little bit. But, you know, we'll just have to wait and see.

MONTAGNE: NPR's Jim Zarroli speaking to us from New York. And again, Hurricane Katrina has made landfall on the Louisiana coast and it continues to threaten New Orleans.

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