I realize it’s stating the obvious at this point, but I originally wrote this a week ago for Forbes, well before it became apparent that Hurricane Harvey would devastate Houston.
The tropical storm formerly known as Hurricane Harvey continues to dump copious amounts of rain on the Houston area. As a former Houston resident who lived there during the massive flooding from Tropical Storm Allison, I don’t think the city has ever seen anything like what it’s currently experiencing.
Houston is the central hub for the energy industry in the U.S. It is important for oil and refined product imports and exports, it is an important storage area for oil and refined products, and much of the Strategic Petroleum Reserve is close by.
There is also some onshore oil production in the general area, and quite a bit of offshore production. But perhaps most importantly, the five largest oil refineries in the U.S. are on the Texas and Louisiana Gulf Coast, and the two largest refineries in the country are in the vicinity of Houston.
As Tropical Storm Harvey continues to cause severe flooding in the Houston area, how might this impact the oil market?
If you consider the relative locations of oil production and oil refining in Texas, it seems the latter will likely experience the worst outages for the longest period of time. Hurricane Harvey made landfall near Corpus Christi, Texas, which is also another major refining center. These refineries didn’t experience the kind of flooding currently being seen in the Houston area, but they did have to shut down as the hurricane approached. They will likely be back up and running at full capacity this week, barring more extensive damage than has been reported thus far.
The real problem is further up the coast. The Houston-area refineries will likely experience significant flooding, and transportation in the region will be challenging for days. That means not only will the refineries have maintenance issues to deal with, but there will also be personnel issues as employees attempt to deal with their own flood-induced problems.
According to S&P Global Platts Energy, the following refineries have been shut down as a result of the storm:
What does it all mean? We may experience the biggest hit to the nation’s energy infrastructure in decades. Following Hurricane Ike in 2008, refinery utilization dropped from 78% before the hurricane to 67% the week of the hurricane. During Hurricane Katrina, utilization fell from 97% to 87%. But neither of these hurricanes brought the kind of widespread flooding currently being experienced at the nation’s largest refineries.
The U.S. is going to experience a substantial draw on gasoline inventories this week, and for the foreseeable future. The extent of the draws, and subsequently the spike in gasoline prices, will depend on the level of damage to the refineries and to surrounding infrastructure.
Oil prices are falling because crude oil inventories were in good shape heading into the hurricane and because crude oil production will be less affected by the storm. Offshore production will bounce back relatively quickly, but production in the Eagle Ford (which experienced significant rain) may take a little longer to bounce back to pre-storm levels.
The bottom line is that for the next few weeks the nation’s refining capacity is going to be substantially curtailed. An estimated 30% of the country’s refining capacity has been impacted by the storm. Some of that will likely be impacted for weeks. That means there is going to be a period in which we have too much oil, and too little gasoline and diesel. Ongoing price spikes are inevitable.
But until the rain stops and the damage can be assessed, the long-term impact of the storm remains an open question. The impact will be substantial at a minimum, and it could very well be catastrophic to the U.S. energy sector.