Hurricane Katrina Underscores Tenuous State of U.S. Oil Refining Industry
When Hurricane Katrina slammed into the Gulf Coast in late August, the monster storm did more than destroy homes and cities, it shut down many of the region's key oil production facilities for over a week, sending gasoline prices soaring and highlighting the vulnerability of an already strained national oil refining industry.

Of the approximately 20 refineries and production facilities along the Gulf Coast -- from Corpus Christi, Texas to Tampa, Fla. -- Katrina temporarily closed nine facilities and shut down two completely, reducing U.S. oil supplies by about 1.4 million barrels a day, or 8 percent of total U.S. production. Oil company officials surveyed their facilities from helicopters and found that the storm's winds had shifted underwater pipelines and unmoored rigs.

The temporary halts in supply in a region responsible for nearly 30 percent of U.S. oil production also sent shockwaves through the entire industry. Gas station owners in parts of the country reported shortages, prices in some areas rose above $5 per gallon and international oil imports, 60 percent of which normally arrive through Gulf ports, couldn't get through.

"This is the big one," Peter Beutel, an oil analyst with energy company Cameron Hanover, told the Associated Press soon after the storm hit. "This is unmitigated, bad news for consumers."

To combat the effects of the storm and to compensate for lost supply, the Department of Energy was forced to tap into the nation's emergency oil reserves. The department agreed to release 30 million barrels of crude oil from the Strategic Petroleum Reserve, a federal oil stockpile kept in underground caverns along the coast of the Gulf of Mexico. The International Energy Agency, a consortium of 26 industrialized nations, also encouraged its members to up their output to increase supply to U.S. markets.

In the days following the storm, major oil companies like Royal Dutch Shell, Kerr-McGee, Chevron and BP managed to restart production and restore some output, but not before industry analysts and lawmakers could point to how tightly strained U.S. refineries were prior to the storm. The storm showed that any supply interruption or halt in production could have a sizeable impact on the oil industry and, as a result, on the U.S. economy.

"As a result of the hurricane, the situation has become even more acute and a number of critical issues have emerged," Senate Energy and Natural Resources Committee Chairman Pete Domenici, R-N.M., said in a statement announcing a hearing on rising oil and gasoline prices. "Our hearing will discuss whether we have reached our limits of refining capacity, and whether this nation has concentrated our refining and distribution system too much in the Gulf region."

Troubles facing U.S. refineries
The job of the U.S. oil refining industry is to take crude oil -- pumped directly from the ground either in the United States or abroad -- and refine it into usable products like diesel, jet fuel, plastics and the most common product, gasoline.

There are between 144 and 149 operating oil refineries in the United States today, the majority concentrated in Texas and California. U.S. production stands at 17 million barrels of oil per day, according to the Department of Energy. U.S. capacity -- the amount of oil the industry infrastructure has the ability to refine -- is running at a near maximum, between 94 percent and 98 percent.

Because no new refineries have been built in the United States since 1976 and because the existing refineries are expected to produce more oil to meet an increasing demand, the industry is stretched to the limit with many factories operating at full throttle.

Reasons for the lack of new refineries include increasingly stringent federal environmental rules restricting the amounts and types of chemicals released by refineries, communities' unwillingness to host sprawling industrial complexes, and the escalating cost of operating facilities.

"You have federal standards, state standards and local standards ... standards to meet air quality, water quality, waste," Cindy Gordon, refining issues manager for the American Petroleum Institute, which represents over 400 oil companies, told the NewsHour. There are "challenges to permitting, obtaining them, the long time for review, the not-in-my-back-yard type of reaction, and certainly cost," she said.

Companies are required by law to install high-cost, state-of-the-art technology to lesson pollution when they upgrade facilities to boost output.

"Over time, if you're a good businessman, you say, 'OK, I've got this facility, and I'm making 160,000 barrels a day," Ralph Philip, general manager of the Valero refinery in Texas City, Texas said in an MSNBC special report. "If you can make 170,000, it's worth this much money. Where do I go to do that -- if I can find that bottleneck in my refinery and spend money to fix that?"

The trend is not limited to the United States, the world's largest oil consumer followed by China and Japan. Worldwide, demand for oil is growing and the oil industry is having a hard time keeping up.

"The IEA estimates that the global oil demand in 2010 will be about 90 million barrels per day, an increase of nearly 8 million barrels per day over the 2004 number," ICF Consulting, a Virginia-based energy analyst, reported in 2005.

"For the refining capacity to keep pace with this increase ... it would need an additional 13.9 million barrels per day capacity to be built between now and 2010," the report said.

Government, refiners finding ways to ease the strain
Despite the woes facing the industry, overall output is on the rise, according to reports from the Department of Energy. Refiners are using new technology to run their operations more efficiently and cost-effectively. They are also making physical changes to their pipelines and pumps to get the oil from the ground, through distillation pipes and to consumers faster.

"[Oil companies] are continually expanding at refinery," Gordon said. "They are always looking for ways to expand capacity and for better utilization."

According to Gordon, rather than build new facilities, refiners are building on existing locations.

"That's where we think you'll be able to see the greatest impact," she said. "Because you already have the facility in place, you've got the relationship with the community, you've got your pipeline."

Even before Hurricane Katrina underscored the issue, the federal government had stepped in to help refiners bolster production.

A $14.5 billion energy bill signed into law in July 2005 included tax breaks for American oil companies looking to increase refining capacity and President Bush also has offered refiners abandoned military bases to build new facilities.

And to avoid a supply crunch, the Environmental Protection Agency announced it would temporarily allow the sale of higher-polluting gasoline in Alabama, Florida, Louisiana and Mississippi, because those states can't provide enough fuel to consumers that meets Clean Air Act requirements, according to the AP.

-- By Kristina Nwazota, Online NewsHour