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Rita Will Pack Punch At The Pump

Forbes | September 24, 2005
By Scott Reeves

Hurricane Rita turned out to have less bite that Katrina, but its impact will still be felt at the pump.

The storm made landfall at 3:30 a.m. EDT on Saturday as a category 3 storm just east of Sabine Pass, on the Texas-Louisiana line, bringing a 20-foot storm surge and up to 25 inches of rain, the National Hurricane Center said. Just before 8 a.m. EDT, the storm was downgraded to category 2.

''It looks like the Houston and Galveston area has really lucked out,'' said Max Mayfield, director of the hurricane center.

Denton Cinquegrana, an analyst at the Oil Price Information Service in Wall, N.J., says it's too early to know the extent of the damage to refineries on the Gulf Coast, but the hit doesn't appear to be as severe as originally feared.

"The major questions are extent of the flooding and when power is restored," Cinquegrana says. "It seems the power fared better in this storm than it did with Katrina -- the outages don't appear to be as widespread."

Depending on the extent of flooding from the estimated 15- to 20 foot storm surge and power restoration, some refineries could be restarted in as little as two to five days after crews arrive, but others could take as much as a week, Cinquegrana says.

Gulf Coast refineries are built to withstand winds from a Category 5 hurricane and the real threat comes from the storm surge. Electrical equipment and seals left in standing water for an extended period are likely to be damaged and require replacement. The speed of the restart depends on how quickly the water recedes and how soon repair crews can get to the area.

Hurricane Rita veered east, and didn't strike Houston directly. That would have threatened major production centers.

But even if the damage is minimal, the impact will be felt nationwide. With refiners shutting down and assuming 4 million barrels per day of capacity is shut in for at least five days, the lost production would amount to 20 million barrels. Gasoline, currently the tightest product, with inventories 500,000 barrels below the five-year average, runs the greatest risk of price increases, analysts say. (See: "Rita Recovery May Be More Protracted Than Katrina's.")

The 21 refineries closed by the storm represent 27.5% of the total refining capability in the U.S., Platt's energy news service reported. Another 5% remains out of commission in the aftermath of Katrrina. The U.S. Minerals Management Service on Thursday said that 605 platforms in the Gulf were unstaffed, compared with 469 on Wednesday. More than 90% of the region's oil production was blocked, while more than 65% of natural gas production was affected.

"Rita will have a significant impact on petroleum product markets even without significant damage similar to Hurricane Katrina," Merrill Lynch (nyse: MER - news - people ) analysts said on Friday.

The storms have exacerbated an already difficult situation for refiners. Unable to build new plants elsewhere in the country, refining companies like Valero Energy (nyse: VLO - news - people ), ConocoPhillips (nyse: COP - news - people ), Exxon Mobil (nyse: XOM - news - people ) and BP (nyse: BP - news - people )were already operating near capacity before Katrina and Rita (See: "Not In My Backyard").

The American Automobile Association's daily survey of prices on Friday pegged the national average for regular unleaded gasoline at $2.748 a gallon, $2.918 for midrange gas and $3.025 for premium. The average price for diesel is $2.826 a gallon. In Georgia, prices spiked above $5 a gallon on Friday.

As for heating oil supplies in the Northeast, it's still too early to worry. Mid-Atlantic and New England residents should have adequate supplies if production resumes quickly. The current price is about $1.90 a gallon.

In the last two weeks, as the damage from Katrina was repaired and production cranked up in Louisiana, average gasoline prices dropped about 28 cents a gallon. But the end of hurricane season won't mean a return to cheap gasoline. Supplies are already being tested by growing international demand.

"We expect global demand for all forms of energy to grow at about 1.7% per year on average, rising more than 50% from about 220 million oil-equivalent barrels per day currently to 335 million oil-equivalent barrels daily by 2030," Rex W. Tillerson, president of ExxonMobil, recently told the Brigham Young Alumni Association.

ExxonMobil's Energy Outlook projects spiraling demand in developing regions: Latin America, up 85%; China, up 100%; and India, up 164%.

Another worry: politics. Jerry Taylor, director of national resource studies at the Cato Institute in Washington, D.C., says the latest round of attacks on "profiteering" are misguided and counterproductive. Injecting politics into the allocation process in the form of price controls may lower prices in the short term, but quickly leads to shortages because demand isn't tempered by the market price.

"One side believes prices are established by supply and demand," Taylor says. "The other believes prices are the result of conspiracy, whim or production costs."

Taylor says this happened in 1973 when President Nixon imposed price controls on oil. The result was long lines at gas stations. Former California Gov. Gray Davis failed to learn this lesson in 2000 and 2001 when he refused to lift retail price controls on electricity. With little or no concern about keeping the monthly bill down, careless use soon led to rolling blackouts in a state with little or no excess capacity. Hawaii's latest foray into price controls won't change the law of supply and demand.

Still, the Federal Trade Commission, perhaps bowing to the perceived need to "do something," is investigating whether oil companies have constrained prices to artificially boost prices.

And the Foundation for Taxpayer and Consumer Rights in Santa Monica, Calif., says there's a danger that government will become hooked on higher revenues generated by the current spike in prices. It therefore recommends a "Windfall Profits Rebate" to consumers.

"The Windfall Profits Rebate would encourage consumers to reduce demand, industry to increase available supply, and eliminate the financial incentives for oil companies to short the market," the group says in a report titled "The Partnership Evolving Between Oil Companies and Government."

The group calculates that its plan would refund 20 cents a gallon at current prices, or about $3.7 billion a year. Or even more, if gas prices keeps climbing.

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