Hurricane Gustav is currently eying oil producing rigs and the Lousiana Offshore Oil Port (LOOP) as it heads north across Cuba's Pinar del Rio province into the Gulf Mexico.

Over the past decade, oil from the Gulf Coast has become an increasing part of domestic production. (link to DOE production figures) Current figures show that oil rigs in the Gulf produced 1.35 mbd (million barrels daily) in April 2008.

South Louisiana is also home to the LOOP. The Loop is vitally important to the US oil supply handling about 1.2 mbd in oil imports and supplying over a third of the nation's refineries, it was left largely unscathed by Katrina in 2005.

Katrina's Impact

Hurricane Katrina was the most devastating event to occur on US soil within the lifetime of most of us here. Katrina left 1,836 confirmed dead (705 are still missing), and caused over $80 billion in economic damage. Ironically, New Orleans and the oil producing regions of South Louisiana dodged the bullet as the brunt of the storm bore east over coastal Mississippi.

A quick look at the location of offshore oil rigs shows that while Katrina rammed home through a large group of rigs before making it's first landfall in Plaquemines and later in Mississipi, it spared a larger grouping of rigs further west.

The rightward turn also spared the LOOP, and after a short period oil imports through the port resumed. We are unlikely to be so lucky this time around for reasons I'll get to later.

What makes this all the more concerning is that we have the record of what Katrina did to the Gulf Oil industry in hindsight. production was halved from 0.217 mbd in Augst to 0.135 mbd the following month. All told, close to a million barrels a day disappeared from the market. To put this in context, that's a little under half what we imported from the Persian Gulf in June of this year.

The effect at the pump was even more dramatic. Retail gas prices jumped from an average of $2.23/gallon at the start of August to $3.04 a gallon shorty after the storm. That's a 32% hike in prices. A similar price hike today would take gas from an average of $3.66/gallon to around $4.83/gallon. And this price hike was tempered by the loan of European strategic oil reserves for US consumption. Spain, Portugal, and the UK all provided oil loans. All told these loans equaled 4.9 million barrels. In combination with 6 million barrels in loans from the US strategic oil reserve, this helped tame price increases. These loans have all been repayed, and at this time the reserve holds 727 million barrels.

While the impact of Katrina on the US oil supply was catastrophic, it did not cause significant damage to the LOOP. If Gustav follows the projected track, there is a strong possibility that it will damage the LOOP, limiting US imports for a significant period.

The LOOP

Oil tankers are large ships. While this sort of sounds like stating the obvious, it's important to remember that many modern oil tankers need at least 85 feet of water in order to not ground themselves. All of the offshore terminals and the LOOP are in at least 115 feet of water. The LOOP runs from onshore at Port Fouchon Louisiana, 18 miles into the Gulf of Mexico, where the offshore loading terminal sets.

As I noted earlier, the LOOP handles about 1.2 mbd in oil imports. Without the LOOP, those imports have to be rerouted. And with little excess refining capacity elsewhere in the country, the question becomes how to get oil from large tankers onto land. The LOOP serves a vital function and benefits from a distinct geographic location. No where else in the Gulf of Mexico does deep water come so close to land.

The loss of the LOOP for an extended period means that 13% of America's oil import and about a third of our refining capacity will go poof overnight. That's bound to have some impact on gas prices. And Gustav looks like it will have a much more devastating impact on the LOOP than Katrina did.

Gustav's Path

Current tracking models show show Gustav scoring a direct hit on Port Fouchon, bringing Class 4 winds in excess of 130 mph and waves up to 20 feet to bear on the offshore terminal.

Half of the computer models show the storm making a left hook after coming onshore heading towards western Louisiana and the Houston metro area. Two even show the storm popping back out over the Gulf of Mexico very close to Houston. This would be disastrous to the oil industry. Even a weak storm could have a significant impact on refiners along the Houston ship channel, and could cause further damage offshore.

The Oil Drum has a map up showing the location of rigs, refineries, and the LOOP and there likely status after the storm.

Blue means the rigs must be evacuated. Yellow that they are going to need to be checked before restarting. Red that they will require damage to be repaired before restarting production. Onshore it looks like 8 refineries are going to be knocked offline in by the storm. DOE figures put the refining capacity of these facilities at around 1.62 mbd. To put this in context, this is about 9% of total US refining capacity.

A left hook that took the storm back out into the Gulf would likely double that number, particularly if there was extensive damage in the Houston area. Current refinery statistics show that around 368,000 barrels a day of refining capacity is currently idled. This about 1.25 mbd a day of refining capacity is going to disappear, and if the storm takes that left hook anywhere between an eighth and a third of the nation's refining capacity could be taken offline for months. This would have the greatest impact in the PADD 3 area (Texas, Louisiana, Mississippi, Alabama, Arkansas, New Mexico), but the price increases would likely be national.

I recommend visiting The Oil Drum for information about the impact on the oil industry as this storm plays out.