Would an accident at a Louisiana oil refinery mean higher gasoline prices for motorists in Los Angeles? Probably, energy officials say.
With Mideast tensions running high, an unexpected shutdown of even one large U.S. refinery within the next few weeks could send prices on already-edgy energy markets shooting upward. A refinery accident on the West Coast, which is isolated from the vast network of Eastern pipelines and refineries, could have a particularly damaging impact on the region, experts say.
But unless there's an accident, the gasoline supply situation should improve beginning in mid-October. That's when the demand for gasoline, which begins to decrease after Labor Day, will have dropped off significantly and stockpiles should have built up. In fact, industry statistics show that the nation's gasoline stockpiles have increased significantly even since early September and that demand has fallen.
But energy officials say U.S. refineries have a very small margin of safety.
"We are about as vulnerable as we can get," said Terry Higgins, assistant technical director at the National Petroleum Refiners Assn., an industry trade group.
A breakdown at a major refinery would be immediately felt in energy markets like the New York Mercantile Exchange, and the wholesale price of gasoline could rise by 5 cents a gallon within a few days, some industry officials say.
"It would start on the floor of the (exchange), where reaction would be swift and upwards," said Peter Beutel, an oil analyst with Pegasus Econometric Group Inc. in New Jersey. "We have seen how quickly price increases can get passed along."
West Coast refiners usually raise their prices quickly in response to increases on the New York Mercantile Exchange.
Late last month, a fire in one unit of a Shell Oil Co. refinery in Deer Park, Tex., contributed to a sharp run-up on unleaded gasoline futures traded on the exchange. It provides a good example of the nervousness of the market because, despite the damage, the refinery never reduced production, Shell officials say.
The Deer Park refinery is one of 213 U.S. facilities that together produce about 11 million barrels of gasoline and other fuels a day, according to August figures supplied by the American Petroleum Institute.
The total loss of the largest of the huge refineries along the Gulf of Mexico would eliminate only 2% to 4% of the nation's ability to refine fuels. However, with refineries nationwide running at about 93% of capacity, there is precious little room to make up even a small loss.
The nation's ability to produce gasoline will be further constrained in the next few weeks as many refineries shut down for scheduled maintenance after the summer's peak production period. About 18 refineries were idle in August, and that number will grow in the coming weeks, say observers.
Energy officials have kept a wary eye on the nation's gasoline stocks, which at one point a few weeks ago were nearly down to the 205 million barrels considered as the minimum amount needed to keep the system running without interruption. But as of the week ending Sept. 21, gasoline inventories had climbed to about 222 million barrels, giving the industry more breathing room to cope with a refinery accident.
The chance of having a refinery breakdown increases as refineries run at nearly full capacity the world over.
"There is a little larger risk (of a breakdown now) . . . partly because the units are being pushed hard," said Robert E. Cunningham, vice president at Turner, Mason & Co., a Dallas-based refinery and fuel oil production consulting firm.
Even the most sophisticated of refineries are prone to breakdowns caused by human error or mechanical problems that can idle portions of a plant for a few days or weeks.
Even before Iraq invaded Kuwait on Aug. 2, triggering the oil crisis, the industry was under fire. Critics blamed oil companies for overworking refinery crews, putting off regular maintenance and hiring non-union contract workers who, they claimed, receive less safety training than permanent employees.
Although industry officials have disputed such charges, no one denies that refinery accidents occur with frequency. "There are fires all the time," said Thomas Manning, an oil industry consultant in Houston. But, he added, "normally, (fires and accidents) are relatively minor in nature."
And it is true that accidents that have shut down an entire plant have been quite rare. "The way the refineries are structured, it's almost inconceivable that the entire refinery would go down," said oil industry consultant James McDonald.