Refinery Accident Could Take Quick Toll on Local Gas Prices, Supplies : Energy: As seasonal demand declines, threat of a shortage wanes--but there is little safety margin.
Would an accident at a Louisiana oil refinery mean higher gasoline prices for motorists in Los Angeles? Probably, energy officials say.
With Mideast tensions running high, an unexpected shutdown of even one large U.S. refinery within the next few weeks could send prices on already-edgy energy markets shooting upward. A refinery accident on the West Coast, which is isolated from the vast network of Eastern pipelines and refineries, could have a particularly damaging impact on the region, experts say.
But unless there’s an accident, the gasoline supply situation should improve beginning in mid-October. That’s when the demand for gasoline, which begins to decrease after Labor Day, will have dropped off significantly and stockpiles should have built up. In fact, industry statistics show that the nation’s gasoline stockpiles have increased significantly even since early September and that demand has fallen.
But energy officials say U.S. refineries have a very small margin of safety.
“We are about as vulnerable as we can get,” said Terry Higgins, assistant technical director at the National Petroleum Refiners Assn., an industry trade group.
A breakdown at a major refinery would be immediately felt in energy markets like the New York Mercantile Exchange, and the wholesale price of gasoline could rise by 5 cents a gallon within a few days, some industry officials say.
“It would start on the floor of the (exchange), where reaction would be swift and upwards,” said Peter Beutel, an oil analyst with Pegasus Econometric Group Inc. in New Jersey. “We have seen how quickly price increases can get passed along.”
West Coast refiners usually raise their prices quickly in response to increases on the New York Mercantile Exchange.
Late last month, a fire in one unit of a Shell Oil Co. refinery in Deer Park, Tex., contributed to a sharp run-up on unleaded gasoline futures traded on the exchange. It provides a good example of the nervousness of the market because, despite the damage, the refinery never reduced production, Shell officials say.
The Deer Park refinery is one of 213 U.S. facilities that together produce about 11 million barrels of gasoline and other fuels a day, according to August figures supplied by the American Petroleum Institute.
The total loss of the largest of the huge refineries along the Gulf of Mexico would eliminate only 2% to 4% of the nation’s ability to refine fuels. However, with refineries nationwide running at about 93% of capacity, there is precious little room to make up even a small loss.
The nation’s ability to produce gasoline will be further constrained in the next few weeks as many refineries shut down for scheduled maintenance after the summer’s peak production period. About 18 refineries were idle in August, and that number will grow in the coming weeks, say observers.
Energy officials have kept a wary eye on the nation’s gasoline stocks, which at one point a few weeks ago were nearly down to the 205 million barrels considered as the minimum amount needed to keep the system running without interruption. But as of the week ending Sept. 21, gasoline inventories had climbed to about 222 million barrels, giving the industry more breathing room to cope with a refinery accident.
The chance of having a refinery breakdown increases as refineries run at nearly full capacity the world over.
“There is a little larger risk (of a breakdown now) . . . partly because the units are being pushed hard,” said Robert E. Cunningham, vice president at Turner, Mason & Co., a Dallas-based refinery and fuel oil production consulting firm.
Even the most sophisticated of refineries are prone to breakdowns caused by human error or mechanical problems that can idle portions of a plant for a few days or weeks.
Even before Iraq invaded Kuwait on Aug. 2, triggering the oil crisis, the industry was under fire. Critics blamed oil companies for overworking refinery crews, putting off regular maintenance and hiring non-union contract workers who, they claimed, receive less safety training than permanent employees.
Although industry officials have disputed such charges, no one denies that refinery accidents occur with frequency. “There are fires all the time,” said Thomas Manning, an oil industry consultant in Houston. But, he added, “normally, (fires and accidents) are relatively minor in nature.”
And it is true that accidents that have shut down an entire plant have been quite rare. “The way the refineries are structured, it’s almost inconceivable that the entire refinery would go down,” said oil industry consultant James McDonald.
In the past, the United States has been able to turn to other parts of the world to supplement gasoline inventories. But in recent weeks, Europeans have been building up their stores of gasoline to defend against any potential shortages or Mideast war. Also, the Europeans are looking for new sources to make up for the loss of a giant Kuwaiti refinery that produced about 800,000 barrels a day of gasoline and other fuels.
As a result, shipments of U.S. refined gasoline have actually been exported to Europe recently in a reversal of a traditional pattern.
“We cannot today look to Europe to solve our problems because they are awfully tight on gasoline as well,” Cunningham said. “We don’t have the margin of safety that we normally have.”
Despite tighter gasoline inventories, a serious shortage in this country is not likely, say officials. That is especially true east of the Rockies, where a vast network of pipelines crisscrosses the nation, making it relatively easy to ship supplies where they are needed.
“They can move things around relatively quickly in a few days,” Higgins said. “If one (refiner) has a problem, he will quickly go to someone else” for supplies.
Furthermore, the giant Gulf Coast refineries are running at 87.9% of capacity--compared to about 93% nationwide--and have room to boost production to make up for losses elsewhere.
The West Coast, however, is a different story. The region is virtually isolated from the pipelines that serve the rest of the nation, and West Coast refineries are running at about 97% of capacity.
As a result, if a major West Coast refinery had to shut down, it could take two weeks to a month for additional gasoline and fuel shipments to reach California from the eastern part of the country--via tankers moving through the Panama Canal or by tank trucks--or from Asia.
If Chevron’s El Segundo refinery, which produces about 200,000 barrels of gasoline daily, were disabled, nearly 10% of the West Coast’s refining capacity would be lost.
“That’s a pretty big chunk to take out of the market,” said Lewis Blackwell, general manager of supply and distribution for Chevron’s Western region. “Prices would increase pretty significantly.”
Sharp, nationwide price increases would be the most dramatic effect of a refinery accident on either the East or West coasts. Even in calmer times, explosions at major refineries have triggered price hikes in energy markets.
“The impact (of a closed refinery) might be more visible now because there is more tension in the market,” said Blackwell at Chevron. “If there is a fire or a problem at a refinery that is not going to have a major impact on supply, the market may react anyway in the short run in an emotional manner.”
But a surge in prices would be temporary as lost capacity is offset from other sources and as emotions cool down, industry officials say. “It’s worth a nickel a gallon for two or three days at wholesale and spot price,” said Scott T. Jones, president of AUS Consultants in Philadelphia.
Jones, like other observers, is grateful that the current crunch in refinery production did not come in midsummer, when the demand for gasoline is at its peak.
“A loss of a capacity come mid-October will not be as big a deal,” he said.
10 LARGEST U.S. REFINERIES
Daily crude oil refining capacity Oil company Refinery location (thousands of barrels) Exxon Co. Baytown, Tex. 426,000 Exxon Co. Baton Rouge, La. 421,000 Amoco Oil Co. Texas City, Tex. 415,000 Amoco Oil Co. Whiting, Ind. 350,000 Chevron USA Port Arthur, Tex. 329,000 Trans-America Refining Co. Norco, La. 300,000 Chevron USA Pascagoula, Miss. 295,000 Lyondell Petrochemical Co. Houston, Tex. 290,000 Chevron USA El Segundo, Calif. 286,000 Citgo Petroleum Corp. Lake Charles, La. 282,000
Source: National Petroleum Refiners Assn.
10 LARGEST WEST COAST REFINERIES
Daily crude oil refining capacity Oil company Refinery location (thousands of barrels) Chevron USA El Segundo 286,000 Chevron USA Richmond, Calif. 270,000 Atlantic-Richfield Los Angeles 222,000 Atlantic-Richfield Ferndale, Wash. 167,000 Shell Oil Co. Martinez, Calif. 140,000 Tosco Corp. Martinez, Calif. 131,900 Exxon Co. Benicia, Calif. 128,000 Mobil Oil Co. Torrance 123,000 Shell Oil Co. Carson 120,000 Unocal Corp. Wilmington 108,000
Source: National Petroleum Refiners Assn.
