Storm Harvey’s Impact on the Oil Industry

Posted on September 8, 2017

Hurricane viewed from space

The devastating destruction caused by Hurricane Harvey dominated headlines when it hit Texas in August. The scale of the storm has been unfathomable, with 2 million people forced from their homes, a rising fatality count and an economic cost that has been estimated at 190 billion dollars. The implications and consequences of the tragic storm will be felt for months and years to come. This week, people begin returning to work and school, adding a surreal sense of normality to the flooded streets. The repercussions to peoples working lives, especially in the oil industry, are still unknown. The five largest oil refineries in the US are on the Texas and Louisiana Gulf Coast, the country’s oil heartland, as such the energy sector is a major employer in Houston and Texas.

Short Term

This week oil refineries, pipelines and port operations have slowly begun to restart. At least a third of US refining capacity has been flooded, and the return to production will be a slow and testing period. Floodwaters that may have impacted pumps can be dangerous to restarting operations, BP’s Houston campus may be out of use until December. After Hurricane Katrina in 2005, some sites were offline for ten months. 

Whilst in the short term there are no fears of crude oil shortages, a large oversupply before the storm hit and the closure of refineries means that the price is falling. However, the price of refined products such as gasoline is rising and world’s largest consumer of oil may have to begin importing to keep up with demand.

Fracking Test

Harvey has been the first storm to affect shale and fracking operations in the US since the practice started around a decade ago. XTO, Eagle Ford and Chesapeake Energy suspended operations and economists will be watching to see how the companies recover from the storm. As much as 10% of US fracking work could be delayed, as the dirt roads that access the oilfields are inaccessible to workers, lorries and supplies. The controversial method could face further consternation as questions around the profitability of fracking increases with price of oil and lowered productivity.

Global Impact

Major pipelines that transport oil to the East Coast of America and to Mexico have been severely impacted, but the gradual reopening of ports this week means that shortages shouldn’t be a worry on a grander scale. However, the global impact of the storm is starting to be felt in the energy sector beyond Texas. The disruption to the Gulf Coast means longer term logistical concerns may lead to the Atlantic coast having to import more finished products from European refiners.

Suzanne Minter of S&P Global Platts offers this analysis:

“The longer the US refiners are unable to produce adequate product for export, the tighter the markets will get for central and South America, who will be looking for supply from other global refiners. It is key to realize that a temporary reduction of US refining capacity does not imply a shortage of global energy. Therefore, it seems that if, the US refiners are not able to bring refinery utilization back up to pre-Harvey levels relatively soon, there could be a significant shift in trade flows. OPEC members Saudi Arabia, Venezuela and Iraq are among the largest suppliers of imported barrels for the US refiners.” 

Greener Future?

There were stark warnings predicted about the potential of a storm hitting Texas, and many experts in the field have spoken since to say that climate change has “exacerbated and worsened the impact of Hurricane Harvey”. The gross irony of the refineries that contribute so heavily to global warming falling victim to it is leading to greater examination of our obsession with oil. Many are now calling for the government to increase regulation on the industry, but opposition is fierce and the business-friendly US Congress has been quick to refuse any blame for climate change on the oil sector. However, the market changes faster than government agenda, and the improvements in renewables and storage mean the sector is growing rapidly. In 2016 the US solar workforce grew by 25% and wind by 32%, and with Europe and China massively increasing the provision of wind and solar, the industry looks set to be on the brink of a shift in focus.

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