US Refinery Industry Caught Out by Katrina´s Disruption

The rise in oil prices to $70 a barrel after Hurricane Katrina swept through the Gulf of Mexico has highlighted the fact that the US refinery industry is unable to handle short-term supply disruptions.

The hurricane has shut nine refineries with a combined capacity of 2m barrels per day, or about 12.5 per cent of US refining capacity. It has also shut 1.4m b/d of crude oil production, or about 90 per cent, of the US Gulf of Mexico output, and 88 per cent of the region´s natural gas.

With US refineries near capacity and the amount of oil output lost equal to the world´s spare oil production capacity, the industry is vulnerable to price spikes because there are few options to overcome a significant supply disruption.

The 33 percent rise in US petrol futures this week to a record $2.90 a gallon, which equates to a remarkable $121.80 a barrel, was the key driver behind the oil price rally to record levels. As refiners see their petrol-making margins rise above an eye-catching $50 a barrel, traders have pushed crude oil prices higher to get a slice of the bonanza.

Until two years ago, long-term oil prices remained in the low $20s, but this has changed as oil demand has outpaced new capacity in global oil production and petroleum refinery output, creating a very tight oil supply market. Energy analysts say this is unlikely to change in the foreseeable future.

Jim Steele, a commodities analyst with Refco in New York, said the oil market was at a tipping point, with greater attention paid to alternative fuel sources and energy efficiency.

"No longer do you have oil ministers talking about oil prices, but finance ministers, prime ministers and presidents and when that starts to happen, it means people are worried and we can start to see policy changes that will eventually lead to a lowering in the rate of demand growth," said Mr Steele.