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Hurricane Harvey Is Hitting the US Oil Economy Hard

US oil producers are reeling from the impact of Hurricane Harvey, which damaged and shut down numerous refineries along Texas’ gulf coast. The result is a nearly 7% increase in US gasoline futures. For Texans, that means an increase of 15 cents-per-gallon or more at the pump.

The price of fuel is at a two-year high, with the largest increases at the pump being felt in Texas and the southern states. Oil companies are scrambling to get production back up, but it’s a challenge following the biggest hurricane to hit Texas in 50 years.

What’s a Future?

For those not familiar with commodities trading, futures are exchange-traded products that represent a contract. The contract sets a price for a specific quantity of oil, or some other commodity, to be delivered at a future date. For example, a single oil future might promise 1000 barrels of light sweet crude in two months’ time.

Unlike stocks, the increase in price is a bad thing for futures because of the way that oil is traded globally. Since the revolution in US oil technology that led to significant new reserves becoming viable, American oil has been profitable because we can sell it cheaper than competitors. That generates volume sales.

Bring the price of a gallon up, however, and you frighten your potential buyers. Right now that’s exactly what’s happening, and if US producers don’t find a way to bring production back up quickly, they will lose valuable business that is needed to continue production efforts.

Counting Our Losses

Just how much oil has been lost? According to S&P Global Platts, US oil producers have lost 2.2 million barrels per day of refining capacity due to damage or flooding from Harvey. At least ten refining plants from major producers are currently offline, and pipelines carrying oil out of Texas have been clogged.

Part of the reason this storm was so damaging for the oil industry has to do with the way we drill for oil in Texas. The Gulf Coast is home to the facilities that receive oil from the Permian Basin. This oil field is the American oil industry’s biggest windfall in recent history. Its unique layered topography allows oil drillers to access multiple oil deposits in a single well, which means oil from the Permian Basin costs less to produce.

At the moment, two major sections of the Magellan Midstream pipeline are shut down, amounting to a forfeiture of 675,000 barrels of oil per day out of the Permian Basin. Many other producers have been forced to stop pipelines while refineries get back online, and we still don’t know what condition the plants will be in when the floodwaters clear.

Shipping Impacts

In addition to playing a major role in oil production and refining, Texas is home to major ports in Corpus Christi and Huston which have remained closed into the week following the hurricane’s impact. Without the ability to move shipping traffic in and out, oil imports cannot arrive, and the US cannot ship its 3 million barrels-per-day of oil to Latin America.

What looks bad now will continue to hurt for months to come as America will forfeit its strong position in the global oil market to oil-heavy economies like Russia and Saudi Arabia.

The Longview

Some oil experts speculate that Saudi Arabia has questionable reserves, but they continue to flood the market, making it difficult for the US to compete. The desert nation is currently producing at an all-time high, in what many believe is a money-grab from Saudi royalty who fear the supplies won’t last.

Poor oil performance doesn’t help the position of the US dollar, which is currently lagging behind several other foreign bank notes, such as the euro, which has benefitted from a resurgence in EU stocks. China’s major stock indexes have risen to 20-month highs, a negative for the US. But in a glimmer of hope, markets shrugged off North Korea’s recent missile launch into the ocean near Japan.

Assessing the Damage

Should futures remain 7% high and the dollar continue to underperform, we could be looking at the beginning of an economic downturn. However, at the end of the week, they were trading at closer to 4.5%, not ideal, but an improvement. None of the seven affected refineries is back online, and the result is that American oil production is down almost 17%.

The key for the oil industry to recover smoothly from this devastating storm is for refineries to remain intact. Exxon Mobile has already shared that two of their refineries, including the second-largest in the country, will require repairs following the storm. How long it takes for those repairs to be completed could have a serious impact on our position in the global oil trade.

This storm has been incredibly devastating in many more aspects than just the oil industry. At the moment, our main concerns should be donating our time, money and resources to help the people and other living beings that are struggling amidst the havoc. No one can put a price on the human lives that have been taken or severely hurt by this insane storm.

However, there is no denying that we could see this event having a profound impact on our country’s economy as a whole down the road. In the coming months, we will have to continuously work as a nation to help get things back into some kind of relative order. And we can expect to see oil companies scrambling to bring their plants back online. Will it be enough? Only time will tell.

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Kate Harveston is originally from Williamsport, PA and holds a bachelor's degree in English. She enjoys writing about politics and social justice issues. When she isn't writing, she can usually be found curled up reading dystopian fiction or hiking and searching for inspiration. If you like her writing, follow her blog, Only Slightly Biased. You can also email her at [email protected] with questions or writing opportunities.

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5 thoughts on “Hurricane Harvey Is Hitting the US Oil Economy Hard

  1. According to this the September delivery is way way up, (not surprising), but the October contracts are only slightly up, and the further out months are more or less consistent with long term trends

    This article also provides the context that right now everyone is on their last run of summer grade gasoline; in another month, production gets somewhat easier and cheaper, and (i think, but I am not at all sure) the blends become more fungible across regions – thus ammeriolating localized supply distruptions.

    The other macroeconomic effect will be of course, recontruction, but if and only if the hit to the financial industry doesn’t unconcover some systemic weakness. I.e. as long as insurers remain solvent, everything will be fine. Government interest rates, while off their low peg finally, are still pretty low, so additional debt at this point shouldn’t have a net negative GDP macroeconomic effect – and the demand side push may finally get the Treasury Yield curves closer to ‘normal’ parameters, so the Fed has some wiggle room when the next downturn inevitably occurs.

    But maybe the market is significantly mispricing the distruption in Houston energy production & delivery infrastructure, and we can’t really count on the US Federal government acting in a mesured but decisive manner over the next couple years. (The US treasury techincally doesn’t have the ability to take on new debt right now because of the debt ceiling limit)


  2. Poor oil performance doesn’t help the position of the US dollar, which is currently lagging behind several other foreign bank notes, such as the euro, which has benefitted from a resurgence in EU stocks. China’s major stock indexes have risen to 20-month highs, a negative for the US. But in a glimmer of hope, markets shrugged off North Korea’s recent missile launch into the ocean near Japan.

    A shift from a Petrodollar ‘standard’ to a Petroeuro (or Petrorenminbi or what have you) has been a bugabear of the zerohedge and Oil Drum (rip*) crowds in their heydey. It..still hasn’t happened yet.

    The US Dollar is down for the year compared to the Euro, but that’s because the Euro was at a multi-year low due to the Greek crisis and then the Brexit risk. The ‘high’ now of the Euro would have been the dip in most of the past ten years.

    And of course, a weak dollar helps some sectors (and hurts some), just like a strong dollar helps some and hurts some.

    *I didn’t realize until looking it up that they were no longer a thing.


    • The Oil Drum pretty much had to shut down once it became clear that global production was not going to fall off a cliff nor was the end of the world as we know it coming in the next few years. Most of their resident doomsayers have moved on to climate change (and the imminent end of the world as we know it). I’ve always been perplexed by the attraction of the EOTWAWKI concept — I’m a big fan of computers, data networks, modern medicine, and indoor toilets. Not necessarily in that order.


  3. Worth noting that impacts will likely be regional. For refined products, PADD 5 (states touching the Pacific, plus Arizona and Nevada) and PADD 4 (Rocky Mountains, less New Mexico) are largely disconnected from the rest of the country, and entirely disconnected from the Gulf Coast refining capacity. Even indirect effects should be small — the outside refineries that serve PADDs 4 and 5 are a long way from the pipelines the Gulf Coast refineries keep full. A useful piece of history might be the natural gas price spike that followed Katrina/Rita: it was pretty much a non-event in the West.


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