Over the past several days, thousands of people have been displaced since Hurricane Harvey made its initial landfall in eastern Texas. The images shown documenting its impact, especially in the areas hit with the heaviest devastation, have been saddening to say the very least. As the storm continues to run its course, our thoughts are continually with everyone who has been and may be impacted.
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While a much lessor concern, the Hurricane’s economic impact is getting particular attention given not only the size and scope of the storm, but the fact that the area most impacted is among the largest oil production and refining regions in the world. Though we tend to think about the region in terms of “energy,” the term actually encompasses two very different, yet related industries, oil and gas production, and refining which transforms crude oil into usable products like gasoline and diesel.
Normally, severe weather in the Gulf is accompanied by rising oil prices, but prices have actually been falling in the past few days. Why is that? Thus far, Hurricane Harvey has had a greater impact on oil refining than it has had on production. Much of the U.S.’ refining operations are concentrated in coastal Texas and Louisiana. In fact, Texas refines the most oil of any state averaging about 5.5 million barrels/day, which is equivalent to about 30% of the nation’s refining capacity. Currently, nearly one-half of this capacity (over 14% of national oil refining) is offline, a figure likely to rise by the time Hurricane Harvey has left the area. Louisiana processes almost 3.4 million barrels/day, which accounts for 18% of the nation’s refining. At this point, there have not been any reports of refineries in Louisiana shutting down, though it would be reasonable to expect there may be shutdowns as the storm moves east.
As refineries have been shut down (due to damage, the inability for workers to reach them, or the inability to get gasoline out of them) a lack of demand for oil has been created. In turn, this has increased the amount of oil in storage waiting to be refined, thereby depressing prices. On the other side, refiners’ inability to produce and distribute gasoline and other refined products is weighing on supply and driving those prices higher. The chart below shows the difference between the price of oil and the price of gas, which generally tend to move together, but at times–and especially now–have diverged considerably, and the impact of refinery shutdowns on the price of gasoline.
Per Matthew Peterson, Chief Wealth Strategist, “We have already seen the impact on the price of gasoline on a national level. However, gasoline can be a very localized market where not all are impacted, and certainly not to the same extent.” Peterson added, “Until Harvey has moved on, and refineries release more data regarding shutdowns and how long it will take them to restart operations, we would expect higher prices at the pump in most places–which likely means more volatility in the crude oil market.”
Article by LPL Financial