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.
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.
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.