A second major Texas refining hub succumbed to the threat of Hurricane Ike late Thursday, bringing the amount of idled capacity in the U.S. to more than 20% and foreshadowing a rise in pump prices.

Operators of three refineries northeast of Houston decided to halt production Thursday night, as forecasters adjusted their paths for Ike's winds and storm surge. Ike has now forced the shutdown of 14 refineries responsible for 3.72 million barrels a day, or 21% of total U.S. refining capacity. Nearly all oil and gas production in the Gulf of Mexico is also shut in, though most platforms have avoided the worst of the storm.

Hurricane Ike is expected to make landfall near Galveston, Texas, as a strong Category 2 or weak Category 3 storm at about 1 a.m. CDT on Saturday, according to the National Hurricane Center. The storm's current path scores a direct hit on the refinery corridor along the ship channel linking Galveston and Houston.

Retail gasoline prices have stayed tame this hurricane season after breaching the $4-a-gallon market earlier this year. Although Hurricane Gustav shuttered most refineries in Louisiana ahead of its Sept. 1 landfall, none of the plants were badly damaged by the storm and companies were able to draw on a comfortable gasoline inventory cushion while they were restarting their plants. In addition, there was already some slack in the sector, as refineries across the U.S. that weren't running at full rates were able to partly compensate for the shutdowns.

Louisiana refineries are still recovering from Gustav, though, and the gasoline inventory cushion has dwindled. Imports from Europe could stave off severe price spikes, but gasoline prices, which lately have been depressed due to waning demand, need to rise more to attract those tankers.

Benchmark gasoline futures were recently 1.1% higher at $2.7794 a gallon after trading as high as $2.8793 on the New York Mercantile Exchange. Gasoline futures are up 8.5% since Tuesday, while Gulf Coast wholesale gasoline for prompt delivery continued to trade at $2 over the screen, a historically wide premium. Movements in retail prices tend to lag trends in wholesale prices by days or weeks.

A scarcity of gasoline isn't a problem just for the Gulf Coast. Pipelines transport fuel from Texas and Louisiana up the eastern seaboard. States such as North Carolina, South Carolina and Georgia are almost entirely dependent on these piped supplies for their gasoline and diesel.

A Greater Threat Than Rita

The response by refiners to Ike is rivaled only by their actions in the run-up to Hurricane Rita in 2005. A similar roster of refineries shut down before Rita hit, as the storm appeared headed for Houston, then swung north just before landfall to slam into Beaumont. About 27% of U.S. capacity was down in late September of 2005, between the Rita shutdowns and Louisiana refineries still recovering from Hurricane Katrina.

Ike poses a greater threat to refiners than Rita, less than a day before landfall. Rita's uncertain path forced shutdowns along a wide stretch of Texas coast, but ultimately that storm damaged only the area around Beaumont and Port Arthur.

Ike has the potential to cause severe damage across the entire region. In addition to winds of up to 115 miles per hour, Ike could generate a 25-foot storm surge that threatens to swamp not only the Houston area, but also sections of the coast along the northeast edge of the storm.

"Hurricane Ike is (a) gigantic (Category 2) monster and is likely to generate a massive and particularly destructive storm surge at key refinery centers at Port Arthur and the Sabine River Pass southward to the huge refining complex at Galveston Bay over the next 24 hours," wrote Jim Rouiller, senior energy meteorologist for Planalytics.

The gasoline market has no precedent for a long-term disruption to both the Houston area and Beaumont-Port Arthur refineries. Rita affected only Beaumont, while Tropical Storm Allison damaged a couple Houston-area refineries in 2001. Houston last took a direct hit in 1983, from Hurricane Alicia. Some refineries continued to operate even as the storm passed over, and gasoline production quickly returned to pre-Alicia levels.

Eyes On Inventories

Gasoline inventories are already lower than they were after Hurricane Rita, as Louisiana refiners only recently ramped up following Hurricane Gustav's passing over Labor Day weekend. Stocks dropped by 3.5% in the two weeks after that storm before bouncing back. A similar draw after Ike would send gasoline inventories to their lowest level in at least 18 years.

The active gasoline market has kept a tight cap on oil prices. Futures traders are buying gasoline and selling crude, to take advantage of the spiking "gas crack," an approximation of the profit refiners earn from producing fuel.

Even if Ike causes no damage to refineries, the storm will almost certainly rock energy markets once it hits, said Nauman Barakat, senior vice president at Macquarie Futures USA.

"The shut ins and power outages will have a devastating impact," Barakat said. "Cracks ... already look rich but will get richer."

 
   14 TEXAS REFINERIES SHUT AHEAD OF HURRICANE IKE 
   (3.72 MLN B/D PROCESSING CAPACITY, 21% OF US TOTAL) 
 
HOUSTON AREA REFINERIES SHUTTING DOWN 
COMPANY           LOCATION           THROUGHPUT     RESTART 
ExxonMobil        Baytown            562,500        n/a 
BP                Texas City         417,000        n/a 
Shell             Deer Park          333,700        n/a 
LyondellBasell    Houston            247,000        n/a 
ConocoPhillips    Sweeny             247,000        n/a 
Valero            Texas City         218,500        n/a 
Astra/Petrobras   Pasadena           100,000        n/a 
Valero            Houston             83,000        n/a 
Marathon          Texas City          76,000        n/a 
 
CORPUS CHRISTI REFINERY SHUTTING DOWN 
Flint Hills       Corpus Christi     305,000        n/a 
 
PORT ARTHUR REFINERY SHUTTING DOWN 
ExxonMobil        Beaumont           348,500        n/a 
Motiva            Port Arthur        285,000        n/a 
Valero            Port Arthur        260,000        n/a 
Total             Port Arthur        240,000        n/a 

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(Susan Daker in Houston and Rose Marton in New York contributed to this article.)

NOTE: All refineries affected by Hurricane Gustav have restarted or are in restart mode, although throughput may be limited by the suspension of U.S. Gulf of Mexico crude oil output. On Thursday, ConocoPhillips' Belle Chasse, La., refinery was the last of those affected to regain power and begin the restart process.

Copyright (c) 2008 Dow Jones & Company, Inc.