A hurricane could cripple US refining when the world can least afford it
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By Matt Egan, CNN
New York (CNN) — The global energy system is already being pushed to the brink. A hurricane barreling down on America’s refining nerve center is the last thing that’s needed.
Isaias, the Atlantic season’s first hurricane, is arriving at a time when there is almost no margin for error.
US refineries, mostly located along the Gulf Coast, are running as hard as they can to offset war-driven outages overseas. Fuel inventories that act as shock absorbers have already been tapped. And America’s emergency oil stockpile is at the lowest level since 1982.
Hurricane Isaias “could be a gigantic event. It’s the worst time something like this could happen in 25 years,” said Robert Yawger, director of energy futures at Mizuho Securities.
The actual impact of Isaias will depend on the storm’s path and intensity.
Current forecasts call for the storm to hit east of New Orleans, a major refining hub, which should spare vital energy infrastructure from the storm’s worst.
Still, major oil producers including Shell, Chevron and BP have evacuated non-essential personnel from oil platforms in the Gulf and curtailed production.
As of midday Wednesday, about 512,000 barrels per day of Gulf of Mexico oil production had been shut in, according to the federal agency Marine Minerals Administration.
That amounts to about 25% of the region’s production. And about 16% of current natural gas production in the Gulf of Mexico has been sidelined.
The risk is that the storm’s damage could squeeze supply chains even more, further raising historically high prices.
The Iran war, combined with Ukrainian drone attacks in Russia and export restrictions in China, have catapulted diesel prices to all-time highs. Gasoline was more than $4.40 per gallon last week and has never been this expensive at this time of year.
Shock absorbers have shrunk
About 2.7 million barrels per day, or 14%, of America’s refining capacity, lie within or near the projected of the path of the storm, according to Andy Lipow, president of Lipow Oil Associates.
Lipow said he expects at least some refineries in the New Orleans/Baton Rouge and Mississippi/Alabama regions will have to slow down how much oil they turn into gasoline, diesel and jet fuel.
Tankers delivering oil to refineries and loading fuel out of refineries could get delayed as well. This would particularly impact Florida because the state relies on shipments of fuel from the Gulf Coast.
“There is no slack in the system to make up for lost refinery capacity. Lost production will have to come out of already low commercial inventories,” Lipow wrote in an email.
Those commercial inventories have been whittled away.
Gasoline stockpiles recently fell to their lowest seasonal record since 2012, according to federal data.
Distillate inventories, which include mostly diesel, are at their lowest level for early October since tracking started in the early 1980s.
Not only that, but the Strategic Petroleum Reserve has been aggressively drained to ease the energy shock. The SPR now holds about 283 million barrels of crude, the least since 1982 when the emergency reserve was being filled during the Reagan administration.
‘It would be a disaster’
Refineries in the Middle East have been damaged by the Iran war, or have struggled to get shipments out to the rest of the world. Refineries in Russia have been destroyed or damaged by drone attacks. And China, seeking to avoid fuel shortages, has restricted its exports.
US refineries, operating at about 95% of their capacity, are one of the remaining key sources for the global fuel supply.
“It would be a disaster if US refining capacity has to come off the market. It would basically force a diesel export ban,” said Yawger, the Mizuho executive, who added that he is not in favor of restricting US diesel exports.
Much depends on the intensity of the storm, including the severity of flooding and wind damage. Isaias could peak as a Category 2 storm with 110 mph winds by early Friday, but is expected to weaken somewhat before landfall.
Even with a Category 1 hurricane, it can take a week to return refining operations to normal.
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