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Saturday, September 24, 2005

Rita's Long-term Impact on US Oil Unknown

There is a rather odd side to human nature. Take a problem, present it to the audience in its maximum horror and suggest it is about to happen, then ameliorate it a little, and tell everyone how the world is not nearly as bad as it is painted. And everyone agrees that things are looking up. But you are still facing a very bad situation - only the way the news has been presented makes it seem that there is no longer a problem.

Consider that, just yesterday, Texas was facing the third worst storm in known history and things looked very dire. The storm has now got just a bit less intense and folk are already talking about Houston having "missed the bullet." All of a sudden a Category 4 hurricane becomes news enough to ease oil prices.

We have seen this over the past year with oil prices themselves. Prices rise from $30 to $40 to $50 and then they fall back $3 and we discuss the "collapse of the price of oil." It rises to $60 and then $70 and then slips $4 and suddenly "the crisis is over."

The worst case scenario for U.S. oil and gas infrastructure after Hurricane Rita reaches land could have gasoline supplies strained further than they already are and prices reaching record levels, some analysts said on Thursday. Other analysts say prices have the "Rita effect" built in and that once the storm clears land, refineries will come back, imports will start to arrive and prices will decline.

But until Hurricane Rita reaches land, the impact it has on U.S. Gulf Coast energy infrastructure and on the price of gasoline and heating oil remains a wildcard. Hurricane Rita, now downgraded to a Category 4 storm, has veered toward the east and now is expected to make landfall early Saturday just north of Houston, Texas, shifting the focus away from refineries in Corpus Christi and toward the Louisiana border.


Katrina blew a big hole in the product market. If Rita doubles that, we are in for some serious problems," said Jamal Qureshi, an oil analyst at Washington-based PFC Energy. Already tight U.S. refining capacity was strained further after four refineries in Louisiana and Mississippi closed after flood damage from Katrina, sending the average price of a gallon to a record $3.06 a gallon.

"This could be almost worse than Katrina because there are 4 million barrels of refining in Texas areas, much more than there was in New Orleans," said Tim Evans, analyst at IFR Energy Services in New York. "(Texas) is the other major refining heart," he said, adding that Rita will be a stress test for Gulf Coast refineries.

Lack of power has kept the Louisiana refineries closed for more than three weeks, so any sustained closure of Texas area refineries will hit supplies of gasoline and heating oil needed for winter fuel. But some analysts think that Rita won't have that much of a sustained effect. "The market has already bid up the price of gasoline. It's been buy the rumor and sell the fact," said Sarah Emerson, director of petroleum at Boston-based ESAI Inc.


As the storm neared, Texas refiners intensified efforts to prepare for the hurricane by shutting down operations, taking down about 29 percent of U.S. total refining capacity. According to Qureshi, the best case scenario would be 2 million bpd of refining capacity out for four or five days. The worst case, he said, is if a big chunk of refining capacity is out for weeks or months, much like Katrina knocked out four refineries in Louisiana, which are still not back in operation after more than three weeks.

"The market is certainly tightened by this event," said IFR's Evans, who said he wouldn't be surprised to see gasoline stocks fall substantially but with demand limited by a slowdown of gasoline demand which has fallen to 6.5 pct below August levels over the past two weeks.

But some industry observers think that there will be a big difference between Rita and Katrina, which wreaked havoc on Louisiana and Mississippi. "After Katrina, there were a bunch of refineries which didn't sustain structural damage but couldn't turn the power back on," ESAI's Emerson said. While Houston isn't below sea level like New Orleans, it still can see some damage from flooding. "Houston isn't as vulnerable, but there could still be dangerous storm surges," said Aaron Brady, analyst at Cambridge Energy Research Associates.

It has been fairly easy for FEMA to meet the needs they have to hand out water, and to hire (purportedly at $24/hr with 16 hours days allowed and a credit card for all expenses) a sufficient work force for that purpose. Unfortunately for the real work in getting the oil and natural gas supplies on hand for the winter they will likely be less lucky. Unfortunately for the real work in getting the oil and natural gas supplies on hand for the winter they will likely be less lucky. The nation and the universities which carry the responsibility to train the technical support that must underpin our economy, has fallen into the management trap of purely meeting the immediate need. Petroleum Engineering Departments are high cost, and have not been strongly supported by an industry that has been more remiss than many in funding the research and development that it now has need of. Thus Departments have closed, and support infrastructure has declined.

And no one expects folks in Boston to go without heat this winter. However, we might expect fewer to heat their offices or homes to the borderline-sweltering temperatures that are not uncommon. And maybe the the usually-sweltering winter temperatures on busses and trains could be cranked down to something reflecting the way people actually dress in wintertime. And maybe a few people might close off some rooms in their palatial houses (compared to any other part of the world). And no one needs to travel a hundred miles to a fifth-grade hockey game, maybe others would make many other adjustments. None of this would all be bad, though, of course, many adjustments are not indefinitely scalable. Still we have the impacts of global warming and country debt load to add to the mix of energy shortages. Both will probably make the rebuilding of the coast and energy infrastructure problematic.

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1:49:18 AM    

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