An Easily Threatened Oil Industry

By Justin Blum
Washington Post Staff Writer
Wednesday, September 21, 2005

First, Hurricane Katrina battered oil platforms and refineries, shuttering production and causing gasoline prices to soar. Yesterday, Hurricane Rita was bearing down on the Gulf Coast, threatening more damage to the country's strained oil operations.

A decade ago, such hurricanes may not have rattled the oil industry or pushed prices sharply higher at the pump.

But in the past few years, as global oil demand has increased, the industry has become increasingly vulnerable. A powerful storm or terrorist attack threatens to turn the oil industry inside out and send gasoline prices to record highs.

"When the market is running tight, anything -- whether it's a hurricane, or war, or revolution, or terrorism -- can precipitate a crisis," said Robert J. Lieber, a professor of government and international affairs at Georgetown University and author of "The Oil Decade."

Some recent books have even stoked fears that the world's oil production is peaking, a prelude to an era when wells will run dry. Industry officials say plenty of oil remains in the ground -- it's just a matter of producing it.

But surging global demand -- coupled with production and refining that have not kept pace -- virtually wiped away spare capacity that could be tapped if operations halted in some part of the world.

Katrina dramatically showed the impact of a sudden disruption. After soaring to records, oil and gasoline prices have retreated a bit. But Katrina has left the world -- and particularly the United States -- even more vulnerable to problems developing in the oil supply chain in the coming weeks and months. Some oil production and refining capacity remains off-line in the Gulf of Mexico and on the coast, eating away at the narrow cushion that keeps demand from overwhelming supply.

"This was a big reminder of how tight the system is," said Roger Diwan, a managing director at PFC Energy, a District-based consulting firm. "And what Katrina did is make the system even tighter going forward."

This situation is fundamentally different from price spikes in the 1970s, when oil-producing countries deliberately took supplies off the market.

Without the ability to pump much more oil, the Organization of the Petroleum Exporting Countries has been unable to guide prices lower. The cartel, concerned that high prices ultimately could dampen demand and cut into the revenue of its member countries, yesterday offered to make available to the market the little spare oil it can produce. But similar offers have been rebuffed in the past because there is little global refining capacity to turn those grades of oil into gasoline and other needed products.

The world's thirst for oil has been increasing steadily, largely because of economic growth in the United States, China and elsewhere. Global oil demand this year is estimated at 83.5 million barrels a day, up from 69.8 million a decade ago, according to the Paris-based International Energy Agency. That would represent an increase of nearly 20 percent.

Industry analysts and national security specialists are increasingly concerned about terrorist attacks on oil facilities, particularly in Saudi Arabia, the world's dominant oil-producing country. But less significant events -- such as strikes, political strife or mechanical failures -- could spark similar problems.

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