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Gas Prices in the Eye of the Storm

ORLANDO, Fla. -- As Hurricane Rita barreled toward the drilling platforms and oil refineries on the Texas Louisiana border on Thursday, Floridians prepared for a Gulf Coast storm to disrupt gasoline prices for the second time in less than a month, the Orlando Sentinel reported.

How high prices will jump depends largely on where Rita strikes and how powerful its winds and storm surge are. But the volatile wholesale market for gasoline was already in turmoil Thursday amid concern that production would drop.

"We are already seeing spreads of 50 cents a gallon at the wholesale level," Jim Smith, president of the Florida Petroleum Marketers and Convenience Store Association told the Sentinel . "That means in the next few days we could see $2.99-a-gallon gasoline on one corner and $3.49 on the next, with both making the same profit margin."

Retail prices haven't reacted yet. The AAA travel organization reported Thursday that the average gallon of regular gasoline in the Orlando area sold for $2.72 at the close of business Wednesday, down from $2.74 a day earlier. The average price of a gallon of regular hit an all-time high of $2.98 locally on Sept. 9, according to The Sentinel .

Others noted that oil and natural-gas companies have moved quickly to repair damage inflicted by Hurricane Katrina last month. But a second hurricane could hamper that recovery as companies do triage and send crews to repair fresh damage. The biggest concern is that the supply of gasoline could be curtailed.

"One of the biggest hurricanes ever is headed for the heart of America's refining capacity," Jason Schenker, an economist at Wachovia Corp. in Charlotte, N.C. said in The Sentinel report. "Prices will hit new records if we get reports of flooding and other destruction once the storm passes."

David Pursell, an energy analyst with Pickering Energy Partners in Texas, told The Sentinel that retail prices are unlikely to reach $4 a gallon. He said motorists would likely curtail their driving if prices push past $3 a gallon, and that diminished demand would help hold the line on prices at the pump.

"Retail prices are moving higher, but it's a question of how high," Pursell said in The Sentinel .

Dave Mica, executive director of the Florida Petroleum Council, a group representing major U.S. oil companies, said a second hurricane in the nation's key oil-producing region would hurt. "It's sort of like getting hit hard on one side of your face and then getting hit hard on the other," Mica told The Sentinel .

Mica said the oil industry has recovered more quickly than expected from Katrina, so he is hopeful for a similar rebound after Rita.

Some analysts are not as optimistic. Phil Flynn, vice president of risk management with Alaron Trading Co., said prices could rise sharply after Rita and begin to fall only when the national economy begins to falter, according to The Sentinel . "If some refineries are damaged, prices will rise higher than they did as a result of Katrina," Flynn said. "There would be record pump prices, which would eventually go down because demand will fall as the economy falters."

In related news, Business Week Online reported that energy costs are likely to rise due to the shutdown of Texas refineries. More refineries and oil and natural gas rigs along the Gulf Coast blinked off Thursday as Rita bore down on the heart of the nation's energy infrastructure.

About 5 percent of the nation's oil-refining capacity is still out from Hurricane Katrina's sweep through Louisiana and Mississippi, Business Week Online reported. In the Houston area, representing another 13 percent, every major refinery was closed or in the process of shutting down by Thursday because of Rita, expected to hit shore Saturday.

"It's potentially a bigger threat than Katrina because there is more refining capacity in the Houston area," said Bob Slaughter, president of the National Petroleum & Refining Association in a Business Week Online report. "This is a double whammy for the industry, it's an amazing thing to contemplate."

Larry Goldstein, president of the Petroleum Industry Research Foundation, estimated that precautionary shutdowns would cut refining capacity by more than 3 million barrels of oil a day, about one-seventh of the U.S. total, for a week. Any damage to the plants would compound the loss, he said in a Business Week Online report. To make up the shortfall from Katrina, the United States has imported more gasoline and other refined products from Europe. But the imports are costly, and further cuts in capacity due to Rita are likely to drive up prices, experts said.

After an early jump, oil prices eased at midday Thursday on news that Rita had weakened slightly, to a Category 4 storm. But futures for natural gas, a key fuel for heating homes and producing electricity, continued climbing past $13 per 1,000 cubic feet, nearly twice the level of a year ago, Business Week Online reported.

Inside Texas refineries, crews were conducting termed orderly shutdowns of the massive machinery that turns crude oil into gasoline, jet fuel, heating oil and all the other petroleum products that consumers and businesses use every day.

After watching the storm's path through the Gulf of Mexico on Wednesday, Exxon Mobil Corp. decided Thursday morning to shutter the largest refinery in the country, at Baytown, Texas, and another in Beaumont, Texas. At least ten Texas refineries hunkered down for the storm, including the nation's third largest, a BP plant in Texas City, Texas. Valero Energy Corp. began closing three refineries and cut production at two others late Wednesday. Royal Dutch Shell PLC, Marathon Oil Corp., ConocoPhillips and Motiva Enterprises Inc., a joint venture between Royal Dutch Shell and Saudi Refining Inc., also shuttered refineries that stretched from Houston to the Louisiana border. In Louisiana, ConocoPhillips closed its Lake Charles refinery.

CITGO Petroleum Corp.’s Lake Charles manufacturing facility and corporate headquarters in Houston are also battened down in anticipation of Rita.

"While our main concern is for the safety of our employees and their families in the affected areas, our employees at the Corpus Christi Refinery are returning to work today in order to safely restart the plant and assure that we are able to maintain a normal level of operations there," said Félix Rodríguez, CITGO president and CEO. "Additionally, our Lemont, Ill., refinery continues to operate normally, as do our asphalt refineries in Paulsboro, N.J., and Savannah, Ga. We have relocated essential operations, such as our crude trading operation and executive leadership, to Tulsa, Okla., in order to ensure continuity in our everyday business operations. We will be continually evaluating the impact of the storm on our facilities and have teams in place to assess any impact on those facilities so that we may safely return to normal operations as quickly as possible."

Some experts said the Houston refineries would withstand the storm but that other parts of the energy supply chain were more vulnerable, including electricity needed to run the plants. "It's not so much that the refineries themselves will be damaged, because we're talking about large plants built of concrete and steel," said Stern, the refinery consultant told Business Week Online . "Pipelines and power lines have exposure to the elements."

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