With the eastern shift of the projected path of Hurricane Rita directly into the part of the Houston metro area that contains a huge number of some of the nation’s largest oil refineries and petrochemical facilities, Rita’s economic ripples have now turned into waves with the distinct possibility that they could turn into an economic tsunami.
It now appears almost certain that Rita will substantially disrupt operations at a significant number of the oil refineries that transform crude oil into gasoline, diesel and other products. The only question is how long those facilities will be down and how much gasoline prices will increase as a result of the shutdown. At least eight refineries in the Houston area will shut down soon as they began scaling back operations yesterday. Inasmuch as four refineries in Louisiana and Mississippi have been closed as a result of damage from Hurricane Katrina last month, almost 20% of U.S. refining capacity will shutdown with the closing of the Houston area facilities, which will only reduce already tight inventories of gasoline that have pushed prices to record levels. To make matters worse, the new projected path of the hurricane would also cause probable extensive damage to offshore oil and natural gas platforms and pipelines that were west of the ones that were damaged in Katrina’s path. I think it’s safe to say now that the U.S. energy industry has never had to deal with anything on the magnitude of the 2005 hurricane season.

To put this in perspective, the main worries that energy markets are dealing with are the supply of gasoline for the next few days and the amount of natural gas that will be available for the winter months when that fuel is used to heat homes across the entire United States. About 25% of U.S. oil and natural gas production comes from the Gulf of Mexico region and the entire Gulf Coast region contains a third of U.S. refining capacity. So, higher gasoline prices are a certainty and winter heating bills will also increase substantially. According to the U.S. Minerals Management Service, almost three days of natural gas production have already been lost during this hurricane season and that amount is clearly increasing because about half of the Gulf natural gas production remains shut-in. This is an even bigger problem than a reduction in oil production because the nation’s capability to import natural gas is much more limited than oil.
Reflecting these concerns, the near-month futures price of natural gas was up 1% to $12.59 per million British thermal units yesterday in trading on the Nymex, which means that the price is up over 54% since the beginning of August. November light, sweet crude futures settled up 60 cents on the New York Mercantile Exchange at $66.80 a barrel after hitting a high of $68.27. October Nymex gasoline futures settled up 7.65 cents at over $2 per gallon. However, prices rose sharply in overnight electronic trading after the Wednesday Nymex session ended with crude futures up 65 cents at $67.45 a barrel and gasoline up 4.19 cents at $2.095 per gallon.
Finally, in addition to the impact on the Houston area refineries, Hurricane Rita also poses a major threat for the chemical and petrochemical plants that exist along side the refineries in the Houston area and along the Texas coast. More than 160 plants from Port Arthur to Freeport are in the potential path of the hurricane. That region generates 50% of U.S. chemical-production capacity, and most of those chemical plants were in the process of shutting down yesterday in preparation for the hurricane.
Accordingly, less than a month after Houston showed just how important it is to our nation when it opened its arms to tens of thousands of evacuees from New Orleans and the central Gulf Coast region, Hurricane Rita is about ready to show the nation just how important Houston is to the nation’s economic health. It could be one very tough lesson.
Update: James Hamilton provides his usual measured analysis of the probable economic impact of Rita.