Hurricane Rita: Fuel impact seen to be slight

Sept. 26, 2005
Diesel fuel and gasoline prices should only see a short-term hike at the most in the wake of Hurricane Rita, thanks largely to few Gulf-region refineries suffering major damage from the storm.

Diesel fuel and gasoline prices should only see a short-term hike at the most in the wake of Hurricane Rita, thanks largely to few Gulf-region refineries suffering major damage from the storm.

However, the long-term outlook for diesel prices remains cloudy as winter approaches and diesel production begins to compete with demand from the domestic home heating oil market.

David Pursell, a principal with Houston-based Pickering Energy Partners, contends refiners “dodged a bullet” in avoiding major damage from Hurricane Rita as only two major refineries suffered serious damage.

In Port Arthur, TX, Valero Energy’s refinery – capable of processing 250,000 barrels of oil a day – along with a facility owned by French oil giant Total were the only two reporting damage, which was serious enough to keep them offline between two weeks and a month. By contrast, ExxonMobil’s Baytown, TX, refinery – the largest in the U.S. and capable of processing 557,000 barrels a day – is already back on line.

That’s critical as about one-fourth of the oil and natural gas produced in the U.S. comes from operations in the Gulf region that include one-third of the nation’s refineries, which convert petroleum into gasoline, diesel and other products.

According to Bob Slaughter, president of the National Petrochemical & Refiners Assn., hurricanes of even the enormity of Katrina do not have an overwhelming impact on pump prices because it is the supply and price of crude oil – not so much the available refinery capacity—that drives market prices.

“Crude prices have been steadily increasing since 2004, largely due to strong growth in oil demand in China and India as well as in the U.S.,” Slaughter said. “The result is world demand for crude is bumping up against the worldwide ability to produce crude. Strong demand for crude dissipated the cushion of excess worldwide oil supply, just as strong U.S. demand for refined products has eliminated excess refining capacity in the U.S.”

Still, Rita forced the closure of refineries and oil rigs throughout the Gulf Coast region, effectively idling the production of 1.56-million barrels of oil per day of supply, according to the Energy Information Administration (EIA). That fact alone is going to push up diesel and gasoline prices in the short term.

“A lot of our production comes from the Gulf, and when you have a Hurricane Katrina followed by a Hurricane Rita, it’s natural, unfortunately, that it's going to affect supply,” said President Bush in a White House news conference today. “While there’s a shortfall because of down refining capacity, we will work with what we can,” the President continued. “We have suspended certain EPA winter blend rules so that it makes it easier to import gasoline from overseas. We will continue that waiver to allow broader use of diesel fuel.”

The President also said he is willing to again tap the Strategic Petroleum Reserve to help keep pump prices from skyrocketng. “It's important for our people to know that we understand the situation and we're willing to use the Strategic Petroleum Reserve to mitigate any shortfall in crude oil that could affect our consumers," he said. Still, the onset of winter could push diesel prices higher despite these measures – and that worries many industry experts.

“Diesel prices are high and they are not going to change for the foreseeable future,” said Chris Burruss, president of the Truckload Carriers Assn. “We’re heading into winter soon and that means the need for diesel stocks are again going to compete with the need for home heating oil in the Northeastern U.S. That’s one reason why we need to develop an energy policy as an industry. We need to get the Northeast off home heating oil because they don’t need to use it to heat their homes and it can squeeze our industry’s supply of diesel significantly.”

To help cope with Rita’s human impact on top of that of Katrina’s, American Trucking Assns. president & CEO Bill Graves has called for extending emergency trucking regulations instituted in the aftermath of the first storm.

Graves said he’d like to see: an exemption from federal hours-of-service regulations kept in place; the additional authorization for operating of heavier-than-normal vehicles to speed up relief supply shipments; waive requirements for the purchase of trip permits for registration and fuel taxes for carriers involved directly with relief efforts; and monitor fuel prices to ensure retailers do not take advantage of the uncertain situation regarding fuel supplies.

“Keeping emergency regulations in place will allow trucking companies to maximize their carrying capacity and expedite their deliveries to affected areas,” Graves said. “The trucking industry responded quickly and effectively to Katrina, supplying relief supplies, temporary housing and other critically needed products.”