Refinery Damage Lighter Than Expected

One of the reasons that gasoline prices are not screaming upto $5/gallon as some predicted is that the damage to refineries by Hurricane Rita was less than expected.

DALLAS – Oil companies said Monday that damage to their massive Texas refineries from Hurricane Rita appeared lighter than expected, but analysts are still predicting that retail gasoline prices may remain near $3 a gallon for weeks or even months longer.

This doesn’t mean there still isn’t a possibility that a strong hurricane (at catagory 4 or 5) that comes ashore closer to Houston couldn’t cause major problems for gasoline production/supply. Basically, a bullet was dodged…or more accurately it missed in relation to gasoline production. A sensible policy would be to encourage the production of new refineries (and/or expansion of existing refineries away from the GoM coast). Of course, since such a policy is sensible it wont be done.

Also, there still remains considerable concern with regards to natural gas production. About 93% of the manned rigs in the gulf are still unmanned. This could become a serious problem this winter when winter heating becomes important. According to this article, 78% is offline. According to the Minerals Management Service (MMS) the gulf produces 19% of the U.S. natural gas needs. Thus, shirt cuff math suggests that almost 15% of the natural gas production is no longer available. The total loss of natural gas production due to Hurricanes Katrina and Rita, according to the MMS, is 172.506 BCF, or about 4.73% of annual production.

So while we may have avoided the worst possible scenario with $5/gallon gasoline, gasoline prices are unlikely to decline in the next several months and the natural gas situation is looking somewhat grim.

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Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.