Oil industry braces for another blow

Potential damage to refineries threatens gasoline shortages.

The oil industry is battening down once more as hurricane Rita menaces the Texas coast - an area rich with refineries, shipping channels, and pipelines.

Although it's possible the storm could pass with relatively little damage to oil installations, the industry is bracing for a much more severe outcome, which could even include gasoline shortages.

If the giant hurricane comes ashore near Houston, it could affect about 13 percent of the US refining capacity - more than twice what was damaged in Louisiana after Katrina. The industry worries such damage would take weeks or even months to resolve, and the wholesale price of a gallon of gasoline has already risen almost 20 cents this week. Concern is also rising about the potential for price gouging at the pump.

"It's going to take some understanding from consumers and some patience [with the refining industry]," says Robert Slaughter, president of the National Petrochemical and Refiners Association in Washington.

But the damage could go beyond the refineries. The Houston area is a hub for chemicals, lubricating oil, plastics, sealants, and adhesives used by business. Pipelines in the region supply the Eastern half of the nation with everything from gasoline to hydrogen.

The possibility of losing yet more energy infrastructure because of Rita is already causing some economists to consider lowering estimates for US economic growth this year - perhaps by a quarter of a percent depending on damage. This would be equivalent to the damage done to Florida by hurricane Andrew in 1992. However, the economy is still strong enough to cope with yet another storm and stay out of recession, analysts believe.

"The real problem is energy," says David Wyss, chief economist at Standard & Poor's in New York. "In the worst-case scenario, we could be looking at $5 gasoline, at least temporarily."

After Katrina roared ashore Aug. 30, the average retail price of gasoline popped by 46 cents a gallon to a record $3.01. It then fell back by about 28 cents a gallon. But this week, as it became clear that Rita was developing into a major hurricane, prices climbed again. As of noon Thursday, the wholesale price on the futures market was up about 20 cents a gallon from two days before.

The industry is hopeful that the refineries will survive the storm intact. "They are hardened to Category 3 storms," says Mr. Slaughter. "But we have more [hurricane strength] here."

One vulnerable spot for the refiners is electricity. Although many have standby generating capacity, it's not enough for normal operations, says Slaughter. He has heard that the Houston utility supplying electricity to the area has said it may be impossible to provide power for a couple of weeks.

In the Houston area is ExxonMobil's Baytown refinery, the largest in the nation. Not far away is BP's Texas City facility, the third largest. Altogether, Texas has 28 refineries, 18 of them on the coast.

The Texas refiners ship their products to a large portion of the United States, partly by pipelines, which end in the Northeast and Midwest. After Katrina, some pipelines were damaged or lacked power for their compressors. This resulted gasoline shortages in some areas of the country. If pipelines are out of order for some time, shortages could crop up once again. "You hate to predict," says Slaughter, "but we could be in a situation of that kind."

If shortages occur, they should be relatively short-term because, going into Rita, inventories of natural gas, oil, and gasoline are considered adequate. Crude-oil supplies are higher than normal, perhaps because the oil industry stocks up in advance of winter. "Plus, the [Bush] administration has shown it's willing to use the Strategic Petroleum Reserve," says Dave Costello, an analyst at the Energy Information Administration in Washington.

Gasoline inventories have even improved, says Mr. Costello. "We're not wildly flush with gasoline, but there has been a slowing in demand."

The nation could turn to imported gasoline to help it get through any shortage. "Over in Europe there are huge volumes of refined product," says Mark Routt, an energy analyst at Energy Security Analysis Inc. in Wakefield, Mass.

In addition, Mr. Routt points out, gasoline demand should continue to decline through January as Americans travel less. By the end of the year, he expects, the Louisiana refineries will be back up and running.