What Hurricane Harvey Means For Gas Prices

Residents living along the western Gulf of Mexico are no doubt carefully monitoring Hurricane Harvey, which is forecast to come ashore somewhere along the Texas coast Friday with flooding rains, powerful winds and damaging storm surges. It’s a dangerous situation for a region that hasn’t seen a hurricane since Ike in 2008.

Motorists throughout the U.S. might want to keep an eye on the storm’s impact, too. Why? Because the western Gulf is home to almost half of the country’s oil refining capacity. If flooding causes power outages or otherwise hobbles refineries, the production of gasoline and other fuels will take a significant hit.

The waters of the Gulf also yield a significant amount of the nation’s crude oil. According to the Department of Energy, oil platforms in federally owned waters of the Gulf of Mexico produced 18% of total oil output in May, the most recent month for which data is available. And some energy companies are already announcing production shut-ins as they evacuate crews from offshore oil platforms in advance of the approaching storm.

So what effects should we expect Harvey to have on energy production and prices?

Odds are any reduction in oil output should be modest, since the Gulf is a medium-size oil producing region, and since not all of its production will be shut down by the storm.

But refining is another story. Many of the nation’s biggest refineries are clustered along the Texas and Louisiana coasts, and thus are vulnerable to severe weather. Combined, they accounted for 47% of the nation’s refining capacity in May, according to DOE data.

Energy markets are already reflecting the likely impacts. On Thursday, crude oil futures traded lower, but gasoline futures were up sharply. Given the expectation that refinery closures will lessen the demand for crude oil and the supply of gas, that makes sense.

The loss of refining capacity, if prolonged, would come at a bad time for drivers. The Labor Day long weekend, often thought of as the unofficial end of summer when Americans hit the road for one last vacation, is little more than a week away. Retail gasoline prices often tick up during busy holiday weekends simply because demand rises. Add a kink in the supply chain, and the price bump could be more significant this year.

There’s no reason to fear shortages or major price spikes. Stockpiles of both crude oil and gasoline are ample, and it’s routine for energy companies to import additional refined fuel from abroad during storms. Tankers that have to stay clear of Gulf ports can land their cargoes elsewhere. But those work-around measures add cost. Regular-grade gasoline is currently averaging $2.35 per gallon nationwide, according to AAA. If Harvey knocks a significant number of refineries off-line, I wouldn’t be surprised to see the average price rise by a dime per gallon or more in coming days. Increases in the immediate Gulf Coast area could be more noticeable.

How long those price increases last depends on how extensive the storm damage is. Given current forecasts that Harvey might linger over Texas for several days, the chances for extremely heavy rain and flooding are high. If refineries take weeks to restart operations rather than days, the impact at the gas station could last well into September. In any event, now seems like a good time to fill the tank if you’re running low.

Of course, paying a bit more at the pump isn’t a great hardship for most of us. Folks who are in the path of this rapidly intensifying storm have much bigger worries. To all of our readers on and around the Gulf Coast: Good luck and stay safe.