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.
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
"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?"
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
"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.