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Why Harvey’s Impact At The Pump Could Be Significant

By Robert Rapier on August 31, 2017

Last week I advised those who follow me on Facebook to top off their gasoline tanks. If you haven’t done so, I will reiterate that piece of advice here, for reasons I explain below. I warned that gasoline prices were going to rise, and perhaps by a lot. Now someone has gone on record and suggested that the price rise could be a dollar a gallon or more. 

It may seem far-fetched that gasoline prices could rise by that much, but we are arguably experiencing the biggest hit ever to the heart of the nation’s energy infrastructure. 

I lived in Houston in 2001 during the massive flooding from Tropical Storm Allison. We got 39 inches of rain in 24 hours. They called it a “500-year flood”, meaning you could expect to see such a storm only once every 500 years. 

That storm was one of the motivating factors that caused me to leave Houston. Now, 16 years later, Houston residents have been hit with a storm that’s completely off the charts. The tropical storm formerly known as Hurricane Harvey has set a Lower 48 U.S. rainfall record with more than 50 inches of rain in parts of Houston. It’s the most widespread flooding in Houston’s history.

Harvey is causing an enormous human tragedy, and it is expected to be one of the costliest storms in U.S. history. But Houston is also the central hub for the energy industry in the U.S. It is a critical port 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 in the area.

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. Both of those refineries are currently down as a result of the storm.

Hurricane Harvey made landfall near Corpus Christi, Texas, which is also another major refining center. The Corpus-area 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 capacity this week, barring more extensive damage than has been reported thus far.

But the Houston-area refineries continue to cope with widespread flooding. Critical pipelines have been shut down. Transportation in the region will be challenging for weeks. That means not only will the refineries have maintenance issues to resolve, but there will be staffing challenges as employees attempt to deal with their personal flood-induced problems.

According to S&P Global Platts Energy, roughly 2.3 million barrels per day (BPD) of Texas refining capacity remains down, which is about 12.6% of US capacity. Another 1.0 million BPD has been idled as a result of refineries running at reduced rates. That means an estimated 18% of total U.S. refining capacity is offline.

The bottom line is that for the next few weeks the nation’s refining capacity is going to be substantially curtailed. Ongoing gasoline price spikes are inevitable.

On the other hand, oil prices are falling because crude oil inventories were relatively high heading into the hurricane and because crude oil production will be less affected by the storm. Offshore production will bounce back relatively quickly, with production in the Eagle Ford (which experienced significant rain) soon to follow.

But 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.

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. The gasoline price hikes will trickle across the country, and while the situation may not turn out to be as bad as the worst case projections, it is better to be safe than sorry. If you need gasoline this week or next, it’s better to buy it soon as insurance against the worst case scenario of extensive refinery outages.

The gasoline price hikes will trickle across the country, and while the situation may not turn out to be as bad as the worst case projections, it is better to be safe than sorry. If you need gasoline this week or next, it’s better to buy it soon because of the potential for extensive refinery outages.

Follow Robert Rapier on Twitter, LinkedIn, or Facebook.

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