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Hurricane Rita Threatens Vital US Oil Supply

Hurricane Rita, which is expected to make landfall on the U.S. Gulf Coast by early Saturday, could not only damage homes and businesses but seriously disrupt the U.S. oil industry, which is still recovering from the impact of hurricane Katrina. The Texas Gulf coast is a key oil production center for the United States.

About one-fourth of the oil and natural gas produced in the United States comes from the Gulf of Mexico, an area that contains about one-third of the nation's refineries which convert petroleum into gasoline and other products.

Some 21 refineries are located in the area along the Texas Gulf coast where hurricane Rita could hit, and they could suffer major damage from the storm. The deputy head of the U.S. Energy Department's Information Administration, Howard Gruenspecht, says these refineries account for 23 percent of nation's refining capacity. But he declined to speculate what the impact would be if they are damaged.

"The question is will they have any permanent damage and a lot will depend where the storm hits and exactly how the refineries are situated. In the case of Hurricane Katrina four refineries suffered significant damage that will take another month, to two or three months to repair.... There's more refining capacity in the Texas area but it's still pure speculation to suggest they may have similar problems or different problems," he said.

Not only are the refineries at risk, but so are the offshore oil rigs which number in the hundreds off the Texas coast. Forty offshore rigs were damaged when Hurricane Katrina roared through the Gulf to hit Louisiana and Mississippi. The underwater pipe network that brings the petroleum and natural gas to shore also is at risk.

A significant amount of natural gas is produced in the Gulf of Mexico, and already about half of the output has been shut down because of evacuations in anticipation of Rita and Katrina-related damage.

Energy official Gruenspecht says if there is major damage, replacing the lost gas production would be difficult, and could lead to higher prices for the winter.

"Oil products can be brought in from Europe, and following Katrina significant amounts were. There's some limited capability to bring in liquefied natural gas but the opportunities in increased imports there as a percentage of the market probably is lower than in the case of oil. So natural gas and heating bills I think would be a concern if natural gas prices rise significantly," he said.

But it is the potential impact on gasoline prices that worries most Americans. As Katrina hit, gasoline prices soared at the pump, rising on average by more than 18 percent in just a few days. Some analysts believe if Rita causes a lot of damage, prices could go up by more than 50 percent.

Denise McCourt of the American Petroleum Institute in Washington, which represents 400 energy companies, says the hurricanes are exacerbating what is already a tight global supply of petroleum, creating speculation in trading markets.

"Before the hurricanes came along we were talking about India and China and the great demands they were making on global supply," he said. "This is a global industry and what is happening is that any time there is a disruption anywhere in the world it impacts the price on the NYMEX (New York Mercantile Exchange). The NYMEX has this mindset that says OK what is the price of a barrel of crude going to cost. That's why we've seen the barrels of crude staying up there at the $60 and above range because there is this concern about global supply. Because it's so tight anything that happens anywhere in the world impacts the price."

The refineries are built to withstand high winds, but cannot resist flooding, especially the kinds of storm surges caused by a hurricane. The refineries shut down by Katrina were all damaged by high waters. The fear is that the same may happen in the Texas Gulf coast, causing an even greater economic impact on the United States.