Oil price jumps as Rita heads to refineries

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Saturday, September 24, 2005

Oil, natural gas, and gasoline futures prices are all rising in anticipation of the Hurricane Rita landfall on Friday. The market price for crude oil is rising about 1% a day, while gasoline futures rose 5% both Wednesday and Thursday. Natural gas prices are also rising, with NYMEX Henry Hub price index showing an increase of over 3.5% on Thursday. Oil refineries in the path of the storm, despite the pressure exerted by rising oil prices, are expected to increase their prices which in turn will be reflected at the pump.

The price for crude oil is expected to reach US$68 a barrel after reaching the all-time high in the U.S. at $70.85 on Aug 30, in fear of the landing of Rita along the U.S. Gulf Coast. Along the Texas gulf coastline, whose key U.S. oil production facilities were largely untouched by the catastrophic Hurricane Katrina onslaught three weeks ago, production and distribution facilities have been battened down.

Rita was downgraded to a Category 3 storm Friday as it neared the coast. The storm, packing sustained winds of 125 mph, appears headed for the border between Texas and Louisiana. Hurricane force winds extend up to 60 miles from the center, according to the National Hurricane Center. The storm, currently, is the third-most intense hurricane ever recorded in the Atlantic, just behind Gilbert in 1988 and the 1935 Labor Day hurricane.

Regions of Texas near where the storm is expected to land is home to the biggest concentration of U.S. oil refineries, accounting for 26 percent of the nation's total capacity. After Katrina made its landfall in Louisiana last month, four damaged refineries in Mississippi and Louisiana were shut down, crippling 5 percent of the US capacity. Eighteen of the 26 refineries in Texas are located on the Gulf of Mexico with a combined distillation capacity of 4 million barrels daily.

The National Weather Service has issued a flood watch for the Texas coastline, including Galveston, where the nation's largest oil refinery belonging to Exxon Mobil Corp. is located.

"Some of those refineries in Texas, they're at sea level. It's a table top, it floods very easily, said Ed Silliere, vice president of risk management at Energy Merchant LLC in New York.

Plants have shut down as Rita advances. Shell Oil shut down its seventh-largest refinery in Deer Park, Texas. There is no date set for resuming production. Conoco Philips is shutting its Old Ocean, Texas, refinery. BP is pulling some workers from its Texas refinery and shutting parts of the fourth largest plants in US. Valero, the largest U.S. refiner, said it is closing its plants in Texas City and Houston, with the shutdown to be completed by midday Thursday.

The Organization of Petroleum Exporting Countries (OPEC) agreed at its meeting in Vienna on Tuesday to effectively suspend its quota system for the first time since 1991 Gulf War to relieve the rising oil price by pumping an estimated additional 2 million barrels of oil a day, which will begin at Oct 1 and last for 3 months.

The head of the U.S. Energy Information Administration (the statistical and analytical wing of the U.S. Department of Energy), Guy Caruso, criticized OPEC for constraining production to keep prices high after the 11-member oil cartel pledged to make available the additional 2 million barrels daily.

"Without question," Caruso said Wednesday when asked during a Senate Commerce Committee hearing whether OPEC has contributed to soaring oil prices, "OPEC policy has been to constrain production and collude... Under the FTC definition of collusion and price-fixing, yes."

According to OPEC, 62 percent in U.K., and 24 percent of fuel prices in the U.S. consist of taxes. Consuming nations have a responsibility to invest in refineries and to lower taxes if they want lower fuel prices, OPEC President Sheikh Ahmad Fahd al-Sabah said. He is the oil minister of Kuwait.

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