Hurricane Harvey Wreaks Havoc on Gasoline Prices

How Susceptible is Crude Oil and Gasoline Pricing to Natural Disasters?

Hurricane Harvey is currently tearing through the heart of the U.S. oil county. The eye of the storm is causing damage left, right and centre. Gasoline prices are skyrocketing and crude oil prices are creeping down.

Almost 20% of production in the Gulf of Mexico have been affected as Hurricane Harvey continues to rip through Texas. Just over 10% of refineries have been damaged or evacuated. All told, this sums to 2.2 million bpd offline due to the storm.

Valero’s Port Arthur, Texas, refinery in September 2005. Rick Bowmer / AP file

That’s a huge disruption to the U.S. production of crude oil. But what effect will it have on world crude and gasoline prices?

Disasters, Supply, Crude and Gasoline Prices

How crude and gasoline prices are determined
Crude oil falls in price as refineries out of commission
Increased crude oil supply (from decline in operational refineries) lowers crude price

Part of what affects oil prices is the amount of oil currently available. When there is lots of oil in the market, prices fall. This is in part because consumers have the freedom to choose from many sellers, this forces sellers to lower their prices to be competitive. Because of the shutdown of U.S. refineries, there has been a decreased world demand of crude oil, as the volume of crude needing to be refined builds up. This has increased the reserve amount of crude oil (supply), and lowered the price of crude.

 

Decreased gasoline supply (from decline in production) raises gas prices
Decreased gasoline supply (from decline in production) raises gas prices

When natural disasters occur in oil capitals, it temporarily diminishes the amount of crude oil being produced. When the disasters are big enough, or when they stop rigs and refineries for long enough, the total world supply of oil falls. Now, instead of shopping around for the lowest price, consumers now bid against one another to purchase oil. This raises oil prices. This explains why gasoline prices are currently rising in the U.S.: production has been hindered, supply has fallen, and prices have leaped.

Hurricane Harvey and Short-term Oil and Gas Prices

The U.S. is famous for its large oil reserves. Moreover, the U.S. doesn’t export most of its oil and gas. This means that the storm’s effect on global prices is dampened.

Domestically, gasoline prices rose by 10% just in anticipation of the storm (according to BBC). In fact, U.S. gas prices have hit a two-year peak.  Moreover, the added hit to refineries lowered demand for crude by nearly 3%.

So, what’s the long-run effect?

Hurricane Harvey and the Future

Houston has been hit particularly hard, impeding access to the state’s main gateway port. Shoaling problems will take time and money to fix. How much and how long is currently under serious debate. Full disruption of the energy industry in Texas is unlikely as the U.S. can dip into their overflowing reserves.

To quote Niels Bohr, “prediction is very difficult, especially if its about the future.” Until we know the extent of the damage left by Hurricane Harvey, it is hard to estimate repair times.

One of the best tools for predicting the future is looking at the past. A good example is the Fort McMurray fire disaster of 2016.

Past Disasters: Fort McMurray and Prices

 

(EPA/Twitter/Jeromegarot)

Look at the wildfires that ravaged across Fort McMurray, Alberta’s goldmine of oil sands, in 2016. We saw a rise in crude oil prices and 600,000-1,100,000 bpd taken off-line during the crisis. The month-long shut-down cost Canada billions, and contributed to world crude oil prices hitting $50/barrel. The surviving firms, big and small, had to work hard and fast to survive.

Why?

Because the disaster caused such a disruption (along with military disturbances in Nigeria) that global oil reserves fell, raising prices. Depending on how severe the damage is in Houston, there could be a similar scenario emerging from Hurricane Harvey on gas prices (but opposite effect on crude prices).

What’s next?

Sometimes, the effect of natural disasters on oil prices seems negligible. But we must take the disaster and its effect into perspective. The Fort Mac disaster affected global oil price for months. This current disaster can have ripple effects in the energy industry for months. However, this disaster will most likely not fundamentally alter the energy status quo. Time will dissipate this disruption and eventually the markets should return to “normal”.

The market will adapt to accommodate the crude oil build-up until Houston is back up and running. Most likely Asian markets will compensate for lack of refineries on the Gulf of Mexico, and we should see stockpiles of crude oil diminish and price rise back up. The energy market is fluid, and we will see it encompass this disruption and return gasoline prices to pre-disaster levels.

Until then, we’re all thinking of the people of Houston and wish them the best in these trying times.

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