America's energy heartland scrambled yesterday to brace for Hurricane Rita, while economists struggled to gauge the impact of back-to-back catastrophic storms on the world's largest economy. As major highways out of Galveston, TX, remained clogged with many of the 1.3 million residents fleeing Rita, shippers, truckers and railroads continued to shut down their operations in the Texas Gulf Coast. Houston's port, the second-largest in the US, closed down while CNF's Con-Way Transportation Services, the top regional trucker, closed its terminals just hours ahead of 150-mile-an-hour winds hitting the low-lying coast. Union Pacific and BNSF halted their train shipments. The state's major refiners were also closing down operations in anticipation of Rita, something that could again drive gasoline prices higher again. Rita appeared heading away from Galveston and now might come ashore near Port Arthur - a section of coastline with the country's biggest concentration of oil refineries. These refineries account for 27.5% of US refining capacity. "My message is that shutdowns of industry facilities could impact the flow of gasoline and other fuels," said Red Cavaney, the American Petroleum Institute's president. "The shutdown, or anticipated shutdown, of any significant part of that capacity could affect US gasoline markets." That's because, Cavaney said, more than 5% of US refining capacity has already been shut down by Katrina. So far, 11 of Texas' 26 refineries, with a combined daily capacity of 4 million barrels, have been shut while the US Minerals Management Service said on Wednesday 469 platforms in the Gulf are shutdown, up from 136 on Tuesday. More than 73% of oil production in the region has been shut in. Besides being a major oil and natural gas hub, Texas is also home to about half of the country's chemical production. Economists said they hoped the hurricane would not be as devastating to the region's energy industry as Katrina had been. "We could get lucky and get less energy destruction," said Chris Varvares, president of Macroeconomic Advisers. Economists admitted they were at a loss to put a pricetag on the widespread damage before Rita hits.
Meanwhile, the issue of capacity and a perceived lack of cushion in the North American refining industry is a popular topic today. No one - from Grand Prairie, TX, to Grande Prairie, AB - wants to see gasoline rationing and kilometre-long queues at the pumps. According to Judith Dwarkin, chief economist at Ross Smith Energy Group, you can blame today's pinch at the pumps and the tightness between supply and demand in world gasoline markets on the late 1970s and oil prices that soared toward US$90 a barrel in today's money. So many refineries were built to take advantage of the boom that the energy industry is just now emerging from a 20-year adjustment to get back to peak capacity, which explains why North America could be in a real fix as a hurricane threatens to put a choke hold on plants that produce about 25% of its gasoline. "The number of refineries in the US today is half of what there was in the mid-1980s, and yet they are producing twice as much product," she said. As the crisis lurks, people are wondering why no new refineries have been built in Canada or the US for almost 25 years. "During that period, margins were really quite pathetic. There was really no incentive to build refineries," said
Dwarkin. Refineries were built as demand for oil, worldwide, was actually falling. Consumption later began to catch up, eventually driving capacity to the point today where every refinery on North American soil is running full-out. Tight profit margins and volatility in world oil and gasoline markets drove companies to find ways to add capacity without spending billions on brand new plants. Even with oil surging toward US$70 a barrel and prices for processed petroleum products such as gasoline soaring, refining is still a risky business, according to Petro-Canada spokesman Jon Hamilton. Petro-Canada operates two refineries, a 110,000-barrel-a-day facility in Edmonton and a 130,000-bpd plant in Montreal. "Our refining and marketing profit is just over 2 cents a litre," Hamilton said. He did say refining margins across North America have gone up over the last 10 years, however.
(National Post, Wall Street Journal 050923)