By John W. Schoen Senior producer
msnbc.com
updated 9/24/2005 11:22:44 AM ET 2005-09-24T15:22:44

LONDON - As the Gulf Coast braces for a hit from Hurricane Rita, U.S. motorists could get hit with pump prices well over $3 a gallon, or outright shortages, or both if the storm makes landfall in the heart of one of the biggest concentrations of oil refining in the world.

As of Wednesday, Rita was on track to make landfall to the west of the area south of Houston that is home to some 20 percent of U.S. refining capacity, according to Bill O’Grady, who follows the energy futures markets at A.G. Edwards in St. Louis.

“Of the 11 largest refineries in the U.S., six are in the path of this storm,” he said.

Valero Energy Corp. chief executive Bill Greehey said late Tuesday that the storm’s impact on U.S. crude oil production and refining could be a “national disaster.”

Valero, the largest U.S. refiner, operates refineries in Port Arthur, Houston, Texas City and Corpus Christi, Texas -- all potentially in the path of Hurricane Rita. The company said on Wednesday it would reduce production at its Houston and Texas City refineries to prepare for the hurricane.

At a minimum, refiners in Rita’s path face short-term shutdowns from power outages and flooding that could keep them off line for a week or so. That would have a relatively minor impact on gasoline supplies, which are in relatively good shape -- even after hurricane Katrina knocked out some 10 percent of refining capacity. About half of that capacity has since been brought back on line.

One big reason gasoline supplies have held up is that high prices at the pump have finally begun to squelch demand. Over the last month, demand fell 2.1 percent from last year to 9 million barrels per day. Demand for diesel fuel fell 0.7 percent from last year to 4 million bpd, according to the Energy Information Administration.

The Bush administration also took several emergency measures to head off gasoline shortages after Katrina hit, including easing environmental regulations requiring special regional blends of cleaner burning gasoline. The government also tapped strategic oil reserves and lifted restrictions on imported gasoline, allowing more supplies to flow from overseas.

But there are few additional such measures the government can take to head off shortages if additional refining capacity is knocked off line. Now, with the U.S. oil and refining industry still struggling to restore the damage from Katrina, a direct hit on Texas refineries would be an even bigger setback.

“If you knock out two to three refineries with a category 4 or a category 5, and you hit them head on, you’ll feel the impact immediately, and it would a while before the markets calm down,” said Phil Flynn at Alaron Trading in Chicago. “The impact of this could be worse than Katrina in terms of shutting down refineries.”

Wholesale gasoline prices shot up 13 percent late Tuesday on word that Galveston County, home of several large refineries, was placed on mandatory evacuation orders.

Offshore oil and natural gas production – also dealt a serious blow by Katrina – is once again in Rita’s path.

“It’s going to be coming across the (U.S.) Gulf (of Mexico),” Greehey said. “There’s a lot of oil platforms, oil rigs, (natural) gas platforms, gas rigs. It could have a significant impact on supply and prices. ”

Crude oil supplies have held up well following the storm -– in part because the slowdown in refining cut demand for oil. But that could change if additional offshore production is shut down for extensive repairs.

The loss of refining capacity would also deal a serious blow to home heating oil inventories, which refiners are typically stockpiling this time of year. Heating oil prices recently topped $2 a gallon before pulling back slightly -- up from about $1.25 a gallon this time last year. If supplies tighten due to additional refinery outages, prices could be headed even higher.

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