Markets heaved a premature sigh of relief yesterday but hurricane Rita bore down on the Texas Gulf Coast with a force that threatened serious damage to one of North America's most populous regions and an already-battered oil industry.
Rita's intensity eased yesterday afternoon and national hurricane trackers expected it to spare Houston a direct hit, which led to declines in crude oil and wholesale gasoline prices on futures markets.
Still, the strong category 3 storm had the potential to cause major economic dislocation, particularly if it shifted its course slightly westward and targeted Houston.
The city is not only a centre for petroleum refining and petrochemicals, but is the fourth largest city in the United States and home to dozens of corporate head offices.
"It has the potential for striking another serious blow to the economy, said Mark Zandi, chief economist at Economy.com.
"A very large economy lies in its path -- Houston's economy is five times the size of New Orleans' and so the potential for damage is that much greater."
At the same time, the storm was driving through the heart of the U.S. domestic oil industry -- from head offices of major companies and oil field service companies, to crude oil production platforms and petroleum refineries.
By late yesterday, the U.S. government reported that virtually all oil and gas production in the Gulf of Mexico was shut down, while 15 refineries in Texas were also closed.
"It has the potential to significantly disrupt an already fragile energy industry," Mr. Zandi said. With four refineries still out of commission in New Orleans, any further shutdowns would drive gasoline pump prices to new record levels, resulting in higher inflation and further erosion of consumer confidence.
Rita was expected to make landfall last night or early this morning around the Texas-Louisiana border, the U.S. National Hurricane Centre said. Even with that shift eastward, the Houston area, with more than five million people, was expected to face hurricane-force winds, heavy rainfall and flooding.
"Prior to its current path, we were looking at the worst-case scenario for the industry with the hurricane striking Houston," said John Kilduff, senior vice-president for energy risk management at Fimat USA. The Houston area alone accounts for more than 13 per cent of total U.S. refining capacity.
The new track "saves us from the worst. But this will still be pretty bad," he added.
Investors took some relief from Rita's shift in course and reduction in wind speed. On the New York Mercantile Exchange, crude oil futures fell nearly $2.31 to $64.19 (U.S.) a barrel, while gasoline futures fell 5.38 cents to $2.0856 a gallon.
Refiners in Texas, whose facilities are less prone to flooding than the low-lying ones around New Orleans, said they hope to restart operations by Monday, though that optimism may prove to be misplaced if they sustain major flooding or wind damage.
The entire city of Port Arthur, Tex., was expected to be flooded with a storm surge of more than six metres. Port Arthur is home to several refineries, including Total Petroleum's 233,500 barrels per day refinery and Valero Energy Corp.'s 250,000 barrel-per-day unit. "If some of these facilities can get into a start-up mode on Sunday or Monday, it may limit the impact" on fuel supplies, Ed Malloy, president of Danaher Oil Co. of Fairfield, Iowa, told Bloomberg News. "But if there is damage and there is anything significant to deal with, then we're going to be in a catastrophic situation, supply-wise." In that case, he predicted pump prices in the U.S. could hit $4 a gallon.
Analysts said any sustained shutdown could drive prices for gasoline and heating fuel sharply higher, further eroding consumer spending and confidence. "The increase in energy prices [would]add several elements of uncertainty just as U.S. households -- which now have negative savings rates -- are at their most vulnerable," said Yanick Desnoyers, senior economist with National Bank Financial Inc.
Body blow
North America's economy may face higher pump prices, inflation and eroded consumer confidence from hurricane Rita, experts warn.
$250-billion: Annual economic output in U.S. dollars of the Houston metro area, compared with $50-billion for New Orleans.
60: Number of Houston-area Wal-Mart stores and distribution centres closed before Rita made landfall.
2,300: Number of CenterPoint Energy linemen standing by to restore electricity in the Houston area.
20%: Portion of U.S. refinery capacity shut down by hurricane Rita.
92%: Portion of the Gulf's oil production shut down by hurricanes Katrina and Rita
SOURCE: THE NEW YORK TIMES, HOUSTON CHRONICLE