Rita Could Deal Blow to Oil Industry

As Hurricane Rita closes in on the nation’s refining center, energy experts warned Wednesday that a direct hit to the Houston area could disable more than a quarter of the country’s fuel-making capacity and send pump prices to new highs.

As the hurricane’s likely path became clearer, oil companies stepped up the evacuation of production platforms in the Gulf of Mexico and slowed production at some refineries as a first step toward shutting them completely.

Oil and gasoline wholesale prices rose in New York on Wednesday as traders tried to anticipate the storm’s path and potential effects.

“It really is a touch-and-go situation,” said Thomas Bentz, senior energy analyst at BNP Paribas Commodity Futures. “It’s really going to depend on where the hurricane makes landfall. It’s going to be the difference of paying $3.70 a gallon or staying down under $3.”

The U.S. national average for self-serve regular grade was $2.764 a gallon Wednesday, AAA reported. Though down 2.4 cents for the day, the price remained more than 90 cents above year-ago levels.

Rita grew stronger over the course of the day, becoming a Category 5 hurricane with powerful winds that surpassed the force of Hurricane Katrina when it slammed into the Gulf Coast on Aug. 29.

One of Rita’s potential routes would take it through Houston and other gulf cities such as Corpus Christi to the southwest and the Beaumont-Port Arthur region to the east. The possibility reverberated throughout the energy industry.

The Houston-Galveston area alone is home to nine refineries and more than 13% of the nation’s oil processing capacity. Put together with the plants in Corpus Christi, Port Arthur and Lake Charles in southwestern Louisiana, the region accounts for 27.5% of U.S. refining capacity, according to the American Petroleum Institute.

Rigs and platforms in the Gulf of Mexico are responsible for about 28% of U.S. crude oil production and 19% of its natural gas, according to the federal Minerals Management Service. Many large oil companies are based in the Houston area, which also is home to a huge contingent of traders in oil, natural gas and gasoline and other petroleum products.

Pipelines that originate in the Houston region carry vast amounts of fuel to the Midwest and East Coast, and those deliveries could be affected by Rita.

“That area, and the Houston shipping channel, is really the heart and soul of the U.S. oil industry,” said Phil Flynn, an energy expert at Alaron Trading Corp.

With so much production and refining potentially in Rita’s path, Valero Energy Corp. Chief Executive Bill Greehey said, this latest hurricane could become a “national disaster.”

Valero, the nation’s largest refiner, on Wednesday slowed production at its Houston and Texas City plants and sent all nonessential employees home. Marathon Oil, BP and others were taking similar steps.

On Wednesday, about 73% of the gulf region’s normal daily production of crude oil was offline either as a precaution ahead of Rita’s arrival or because of damage caused by Hurricane Katrina, the Minerals Management Service said. About 47% of natural gas production was shut.

Four refineries knocked out by Katrina remain inoperable, amounting to a loss of about 5% of U.S. refining capacity.

Traders at the New York Mercantile Exchange sent crude oil futures up 60 cents to $66.80 for a barrel of benchmark light, sweet crude. Wholesale gasoline increased 8 cents to $2.053 a gallon on the Nymex.

The worst-case scenario, said Flynn, the Alaron trader, is the loss of an additional 10% to 15% of refinery capacity for an extended period.

“We could see spot shortages; we could see gas lines,” he said. “This could be Katrina on steroids.”

Flynn and others noted, however, that the refineries in the Houston region were above sea level and less vulnerable to flooding than New Orleans and could recover quickly if Rita’s winds don’t cause too much damage.

In Washington, meanwhile, politicians and regulators debated whether price gouging took place in the wake of Hurricane Katrina, when gasoline prices soared nationwide, rocketing as much as 70 cents a gallon.

John H. Seesel, associate general counsel of the Federal Trade Commission, said the agency “is very conscious of the swift and severe price spikes that occurred immediately before and after Katrina made landfall.”

He announced that the FTC had launched an investigation “to scrutinize whether unlawful conduct affecting refinery capacity or other forms of illegal behavior have provided a foundation for price manipulation.”

Tyson Slocum, research director at consumer group Public Citizen, told the Senate Committee on Commerce, Science and Transportation that the sustained high prices at the pump could not be blamed entirely on natural disasters such as Hurricane Katrina.

“We have every meteorologist in the country monitoring hurricanes, letting us know exactly when the next one is going to hit and where,” he said. “But who is monitoring the companies that are jacking up gasoline prices for consumers under the guise of natural disasters?”

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Reuters news service was used in compiling this report.