How Vulnerable Are Oil Markets To Extreme Weather?
Last week, Hurricane Harvey made landfall in the United States and for days disrupted the national energy industry.
Refineries were closed, pipelines shut down, tankers held out to sea. The price of fuel shot up as gas stations went dry across the country, while crude slumped with a third of the U.S. refinery capacity shut in.
A week later, a recovery is evident and most of the shuttered facilities in Corpus Christi and elsewhere are slowly coming back on line. But the impact of Harvey will likely be felt for weeks. Gas prices, according to EIA data, remain high in PADD 1 and PADD 3 (East Coast and Gulf Coast).
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The massive Motiva refinery has resumed partial production, and Goldman Sachs estimates that half of affected capacity will be back-online. But that leaves 1.4 million bpd that could remain off-line through mid-September, depressing prices.
The actual damage to facilities, according to a report from the New Orleans-based Times Picayune, has been relatively minor. Operations are chiefly impeded by flood waters and the inability of staff to return to work. But there have been reports of chemical leaks and pollutant spillages, while clean-up and repair from Harvey to energy infrastructure could take months and cost billions.
The impact of Harvey has had some market watchers ponder the vulnerabilities of the U.S. energy infrastructure, the bulk of which is located in the Gulf region. And a second monster storm, Hurricane Irma, currently barreling towards Florida, has raised questions regarding the long-term security of the national oil and gas industry. Irma could have a major impact on demand as it slams into the U.S. East Coast, further depressing the price as consumption is curtailed.
While traders were bullish in the aftermath of Harvey, with futures rising on the news of refineries coming back on line, there were fears that Irma could swing into the Gulf and cause further disruptions to supply, according to a report from Reuters.
Should the storm remain East of Florida, supply is unlikely to be affected. Bloomberg has reported that damage from the storm, which will blow harder and faster than Harvey, could be as high as $200 billion.
A report in the New York Times noted the damage caused by Harvey, and how in the long-term there will have to be a hardening of the energy infrastructure to protect it against further extreme weather. Recently new facilities have been built quickly, to take advantage of the shale boom. Much of this new infrastructure could be vulnerable to further disruptions, according to research from the Columbia Center on Global Energy Policy.
A representative of RiskHedge wrote in Business Insider that further extreme weather could stall U.S. ambitions to increase energy production, while also pointing out that demand can take months to return after a major storm.
These events raise the specter of climate change and highlight how changing weather patterns could impact global energy in the years to come. Bigger, more unpredictable storms could upset both supply and demand. The Gulf and East Coast regions are both vulnerable to such weather events.
A report on the U.S. energy sector completed in 2013 by the U.S. Department of Energy highlight some of the possible vulnerabilities. The report argues that rising water levels, increasing temperatures, and “more intense storm events” could affect the U.S. capacity to produce, transport and consume energy. The effect of storms on oil and gas infrastructure would be felt in the form of “increased risk of physical damage and disruption to offshore and coastal facilities.”
It’s too early to know the full impact of Harvey, but the warnings in the 2013 report may prove prescient, if further storms batter the Gulf and East Coast as Harvey has done, and Irma looks set to do.
In the short-term, fear of further weather events could have an impact on inventories. Higher inventories would help cushion the impact of shut-downs from extreme weather events, but would depress prices and leave refineries with a surplus.
A key factor in global energy trends is how the U.S. has transitioned from an energy importer to an exporter. When extreme weather, in the form of hurricanes Katrina and Rita, struck the Gulf region in 2005, the U.S. was importing oil in large quantities. Today, disrupted production in the U.S. is felt worldwide, and the impact could be even greater if the U.S. develops new energy exporting capacity, such as additional LNG terminals. A disruption from extreme weather could affect supply to the U.S. and its customers in East Asia, Latin America, Western Europe and elsewhere.
Thus, while the short-term impacts of Harvey appear to be receding, its long-term lessons for how global energy will be affected by weather disruptions are still being learned.