September 22, 2005
Thursday PM

The Texas shoreline in Hurricane Rita's crosshairs lies at the heart of America's oil industry.

A heavy blow from the storm could cripple the nation's energy production and - in the worst case - drive gasoline prices above $4 a gallon, according to some forecasts.

Refineries that produce almost a quarter of the country's gasoline line the coast from Port Arthur to Corpus Christi. All told, Texas has 26 refineries, 18 of them on or close to the gulf.

Offshore, drilling platforms crowd the waters between Houston and New Orleans, the thickest concentration of oil facilities on the Gulf of Mexico. The gulf accounts for about 28.5 percent of the nation's crude oil production.

Now, a Category 5 hurricane is bearing down on the oil rigs, refineries and port facilities along the Texas coast, its strength growing by the day. Refineries, which take days to properly close, started winding down production Wednesday. Offshore platforms have been evacuated. Even some of Houston's oil company offices are sending staff members home.

The Texas refineries and shipping terminals were kept running when Hurricane Katrina hit last month even as storm water swamped oil facilities in Louisiana and Mississippi.

But if Rita hits Houston with its full force, water driven ashore by the storm could reach 10 refineries. If the hurricane veers to the south, it could damage a smaller cluster of refineries near Corpus Christi.

If Rita takes a sharp turn east, it could pound both Houston and New Orleans, perhaps causing more damage to oil facilities still cleaning up from Katrina.

Gasoline prices almost certainly will rise in any of those scenarios. With four Gulf Coast refineries still shut by Katrina, even a temporary closure of facilities on the Texas coast would enlarge the gap in the nation's supply. No other domestic refineries could make up for the gallons lost to the market.

"We have nothing in the United States that could substitute for what's out," said James Sweeney, economics professor at Stanford University. "The only options are importing from other countries and people using less gasoline."

The Houston area holds the Texas coast's greatest concentration of refineries, producing 13 percent of the nation's gasoline supply. Although all the refineries sit above sea level, the complexes could be vulnerable to the kind of storm surge that knocked out 10 refineries during Katrina and caused brief gasoline shortages. Roughly 10 refineries lie within an area that could face a storm surge during a Category 5 hurricane, according to an analysis by the Houston Chronicle.

Of course, no one yet knows where Rita will strike land. The latest forecasts showed the storm's eye passing south of Houston and north of Corpus Christi. Though not a direct hit, that path could still pose a serious problem for Houston since hurricanes making landfall typically vent their greatest fury on areas northeast of the eye.

"Clearly, this is a bigger refining area than Louisiana, and we already have four refineries down in Louisiana," said John Felmy, chief economist for the American Petroleum Institute trade association.

Valero Energy, BP and Royal Dutch/Shell Group all are scaling back production at their coastal Texas refineries. Out in the gulf, the evacuation of oil rigs and platforms that began earlier this week continues.

Katrina briefly shut most of the gulf's wells, leaving only a few near Texas still in production. On Monday, after three weeks of post-Katrina clean-up, about 56 percent of the gulf's production remained offline. At last report, that figure jumped to 73 percent as platforms that had reopened after the last storm closed for Rita.

Officials hope, however, that Rita's effects won't last long.

If the storm loses strength or heads farther south than currently predicted, the refineries now ramping down could restart quickly, creating only a brief pause in the nation's gasoline supply. Gasoline prices would spike but soon retreat, much as they did with Katrina.

"Gasoline prices will increase - there's not any question about that," said John Moroney, economics professor at Texas A&M University. But "it's not a long-term problem. It's a matter of weeks until that refining capacity will come back on line."

Sweeney considers that the best possible scenario. If the storm manages to flood some refineries and knock out their electrical wiring, the effects on gasoline prices could be more severe, possibly driving costs above $3.50 per gallon, he said. The national average for regular is $2.76, down from a high of $3.06 after Katrina.

The worst possibility, he said, would be for Rita to turn east and land between Houston and New Orleans, drenching both cities. That could knock out refineries in Texas as well as some that had just reopened in Louisiana, potentially driving gas prices above $4.

And then there's the question of natural gas. More than 19 percent of the nation's natural gas production comes from the gulf, and Katrina has already pushed prices for the fuel to twice their level from last year. Another storm will only drive costs higher, hitting people who heat their homes with gas as well as states like California that burn it in electrical plants.

"That's not just a transient thing, like the gasoline prices," Sweeney said. "It could go on for months."

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