Potential Impact on Energy Prices and Economic Activity

Crude oil will not likely be affected, as there are only limited amounts of production in the hurricane's path, and those can be replaced by releases from the Strategic Petroleum Reserve.

Gasoline prices could spike to over $4 per gallon if 5% more refining capacity is offline for more than two weeks. (5% of production remains offline due to Hurricane Katrina.)

Natural gas prices could reach $16 per mmBtu in the near term if an additional 2 billion cubic feet (bcf) per day of production is shut-in. In contrast, the price was $6 per mmBtu last winter. (There remains 3.5 bcf per day of production shut-in from Katrina.)

Any significant supply outages for longer than ten days will put U.S. oil and gas supplies well behind levels needed to meet winter demand. As a result, Hurricane Rita has the potential of triggering rolling energy disruptions well into 2006.

Our assessment of Hurricane Katrina found that the U.S. economy would likely absorb the shock with a modest loss of growth in the second half of the year followed by a rebound in 2006. Hurricane Rita has the potential to make the immediate loss of growth much more severe, and to delay and dampen the rebound by keeping gasoline and natural gas prices higher for longer.

The immediate fallout will depend heavily on how long refinery output is disrupted. A loss of another 5% of refining capacity for an extended period, sending the gasoline price to $4, would hit consumer spending power by knocking around 1.5% off real disposable incomes. A more severe disruption would likely mean not just higher gasoline prices, but widespread shortages and queuing—causing major disruption to normal economic activity.

Energy Infrastructure at Risk

Refining

Five Refinery Centers in the U.S. Gulf Coast area are in the potential strike zone: Corpus Christi, TX: three refineries with capacity of 586,000 bpd

Texas City, TX: four refineries with capacity of 948,000 bpd

Houston, TX: five refineries with capacity of 1,344,000 bpd

Port Arthur, TX: four refineries with capacity of 1,122,000 bpd

Lake Charles, LA: three refineries with capacity of 594,000 bpd

Combined, these refining centers are 27% of U.S. refining capacity and supply about: 23% of U.S. gasoline

28% of U.S. jet fuel

26% of U.S. low-sulfur diesel fuel and high-sulfur diesel/heating oil

In addition to the refineries, the Gulf Coast area is a major supply point for propane. The Texas and Louisiana gulf coast area produces 6% of U.S. LPG.

Power outages may temporarily close the pipelines which bring gasoline and other petroleum products to the Eastern United States and Midwest markets.

Any impact will be on top of the 5% of refining capacity still out from Hurricane Katrina.

Natural Gas

Hurricane Rita may plow through the main gas producing regions of the Gulf of Mexico, including the High Island and West Cameron areas. These areas contribute on a combined basis approximately 1.3-1.4 bcf per day, or about 14% of the Gulf of Mexico's total daily gas production.

Additionally, the deepwater East Breaks region, which produces an additional 0.7 bcf per day of gas, will likely be exposed to hurricane force winds. If the storm track continues to drift to the Northeast as it has over the past 24 hours, additional volumes of gas in the East Cameron (0.3 bcf per day) and Vermillion (0.35 bcf per day) areas could be exposed to hurricane forces.

Texas on-shore production that lies in Rita's path is approximately 1-2 bcf per day.

Coming on top of the 3.5 bcf per day that remains offline due to Hurricane Katrina, the 3.8-4.8 bcf per day of production that lies in the path of Hurricane Rita means that more than 10% of U.S. natural gas supply is at risk to be offline for at least a week, and a significant proportion of that may be offline for 30-60 days.

Texas and Louisiana account for 20% of U.S. natural gas demand. About 1 bcf per day of natural gas demand was lost due to Katrina, some long term, as over 200,000 residences are gone and major energy consuming industries remain offline. Rita will have a much larger impact. The Houston area has gas demand of over 4 bcf per day with a large concentration of refineries, chemicals, and power plants. Demand from these facilities is sure to be disrupted for at least a week and possibly longer.

On balance, demand losses from Rita will likely match the additional supply loses, but we are still in deficit by about 3 bcf per day from Katrina and the supply loses may be more difficult to repair as all available crews are working on Katrina damage.

Power Plants

In total, more than 14 gigawatt (gw) of power generating capacity are in Rita's path: Plans are being made to shut down the 2.5 gw South Texas Project nuclear plant near Matagorda Bay. The shut-down is currently planned to take place hours before the storm is due to strike land.

There are 5.7 gw of generating capacity in Houston proper, an additional 3.1 gw in neighboring Pasadena and Channelview, as well as several power plants to the inland side of Houston.

Closer to the coast than many of the Houston plants are those in Texas City (totaling 1.5 gw of generating capacity) and Freeport (totaling 2.0 gw).

Up the coast to the east, there is a total of 0.3 gw of generating capacity in Port Arthur itself, and the large 1.8 gw gas-fired Sabine plant nearby.

For additional information or to answer questions regarding this analysis, please contact:
Kevin Lindemer
Executive Managing Director, Global Energy Services
Global Insight
1.781.301.9059
kevin.lindemer@globalinsight.com