Waiting for Rita

Shortly after Hurricane Katrina hit the eastern Gulf Coast, I commented that a storm track further west could have done even greater damage to the country's energy infrastructure. Unfortunately, we're about to find out if I was right, with Class 5 Hurricane Rita headed directly for Texas.

Not only is the Texas coastline home to a large number of offshore oil and gas platforms, but it is has 23% of US oil refining capacity, more than twice as much as the Louisiana/Mississippi coast. In addition, the refining complex around Houston is the origin and largest supply point for the Colonial Pipeline that carries petroleum products to the Southeast, Mid-Atlantic, and Northeast regions. A hurricane hitting this concentration could create an even bigger oil, natural gas, and petroleum product supply problem than Katrina did.

The market is reacting in predictable fashion. Crude oil is headed back towards $70/barrel, and unleaded gasoline futures, after having dipped below $2.00/gallon recently, seem headed back to record territory, as well. Factor in the facilities that remain offline after Katrina, and we could be in for a real jolt to prices. Aside from the potential damage to the offshore and onshore oil and gas production facilities, any protracted refinery shutdowns in the area could send retail gasoline prices over $4.00/gallon. The only bright spot in the picture is the modest recovery of gasoline inventories since Katrina hit.

In the short term, there's nothing we can do but wait and see, and hope that Rita will shed some wind speed and make landfall away from population and industry. Let's also hope that whatever the industry learned from Katrina about protecting facilities from storm damage has been rapidly disseminated through the internal and external "best practice" networks.