Gustav: What's at stake

A hurricane threatens to halt much of the Gulf of Mexico's oil production, which could send crude and gas prices back up near mid-summer levels.

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By David Goldman, CNNMoney.com staff writer

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Hurricane Gustav is expected to be heading towards the Gulf of Mexico, threatening to halt much of the nation's oil production.
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NEW YORK (CNNMoney.com) -- The Gulf of Mexico is home to 4,000 drilling platforms and 33,000 miles of pipeline, which send 1.3 million barrels a day to the Gulf Coast's 56 refineries. But a hurricane threatens to deal a powerful blow to the oil-rich region.

Hurricane Gustav, which just smacked Jamaica with heavy rain and winds, is heading towards the Gulf of Mexico, and forecasters predict its path will steer right through the heart of the region's biggest concentration of oil and gasoline producers.

Experts say the storm has the potential to significantly disrupt oil production in the region, potentially damaging gasoline refineries, which could send the price of oil and gas back up near record highs.

Production disruption: Though meteorologists stressed that storm prediction is an uncertain practice, by the time it is expected to hit Louisiana on Tuesday. Forecasters say the storm is a Category 4 hurricane with close to 145 mile per hour winds, according to the U.S. National Oceanic and Atmospheric Administration.

"Production will be shut down in the path of the storm," said Cathy Landry, a spokeswoman for the American Petroleum Institute. "Not every rig will be in the storm's path, but the oil companies tend to be very cautious."

The average hurricane halts oil drilling production for more than a week, according to API. Many companies have already begun the evacuation process, as rig workers are forced to evacuate two to three days before the storm hits. As soon as it's safe to return, they have to check for damage before they can restart production.

"Platforms have to withstand not just the winds, but also waves, rain and currents," Landry noted.

The U.S. Department of the Interior estimates that 76% of the Gulf of Mexico's platforms and 67% of Gulf pipelines were in the direct path of Hurricanes Katrina and Rita in 2005. The cyclones, both of which reached Category 5 strength, destroyed 113 offshore oil and natural gas platforms and damaged 457 pipelines.

Gustav appears to be heading in the same direction - right up the gut of the oil drilling and refining region.

"If the storm was heading West or East, then companies could just shut down one region of the Gulf," Landry said. "But it looks to be heading through the center, so a good portion of the Gulf will be shut down."

Refinery damage: The big storms in 2004 and 2005 did considerable damage to oil drilling platforms in the Gulf of Mexico, severely cutting into supply to gasoline refineries on the shore.

Though slow-moving, weak tropical storms over the Gulf of Mexico can halt oil drilling, powerful hurricanes that hit land can knock out refineries. That's because about 40% of U.S. refining capacity is located on the Gulf Coast, namely in oft-hit states like Texas and Louisiana. After Katrina and Rita, 30% of Gulf Coast refineries were shut down or operating with reductions.

It's rare for a refinery to be totally knocked out by a hurricane, but many are susceptible to wind and water damage that can limit supply to and from the facilities. Similar to offshore drilling platforms, refineries are sometimes shut down for more than a week before they can return to full operability, according to API.

Part of the reason Katrina and Rita led to such a spike in gas prices was that there weren't enough functional facilities to make up for the lost output. Although capacity at many U.S. oil refineries has been expanded, there hasn't been a new refinery built in the United States in three decades.

Prices could jump: Some of those living on the Gulf Coast have already reported seeing gas prices jump nearly 10 cents over the past few days. If Gustav damages refineries, prices could go much higher.

"Depending on the timing and impact, the storm could really move this market," said Alaron Trading analyst Dan Flynn. "It's not a far stretch to see oil back over $125 and gas back above $4."

Flynn noted that Tropical Storm Hanna also threatens to enter the Gulf of Mexico, though its path is less certain.

In 2005, the Gulf Coast was battered by two hurricanes - Katrina and Rita - in the span of a few weeks, bringing many Americans their first glimpse at $3 a gallon for regular gas. The destruction from Hurricane Katrina alone led gasoline prices to jump 46 cents, or 17%, in just one week to a national average of $3.11, according to the U.S. Energy Information Administration.

A similar surge now would send gas prices to nearly $4.40 a gallon, well past the previous record of $4.11 a gallon set in July and erasing all the declines seen over the last few weeks.

"The bottom line is what the damage to the refineries will be, but the markets still tend to overreact," Flynn added. "We'll likely see a big spike in the price of gasoline prices."

May not be so bad: Experts say, however, the fallout from Katrina and Rita is unlikely to be repeated.

"Yes, there will be an impact on the market, but we're much better prepared now than we were before Katrina and Rita," said Landry.

Since 2005, the industry began making changes to the structures. The Interior Department in April 2008 imposed more stringent design and assessment criteria for both new and existing structures located within particular Gulf of Mexico areas.

For example, drilling rigs moored to sea floor in the Gulf had been attached with eight lines, and are now required to be moored with 12 to 16 lines. New rigs are built higher out of the water than ones that were built previously, and old rigs were strengthened, according API.

And pipelines, which carry most of the oil and gas from the production platforms to the shore, now are equipped with redundant electric generation stations to ensure the power to the pumps will not be interrupted.

"This storm will be a good test for the [new standards]," said Landry. To top of page

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