Hurricane Harvey Wallops the Energy Industry

The rain is still falling along the Gulf Coast and the flood waters are still rising, but it’s already clear that Hurricane Harvey has crippled the region’s energy infrastructure. As I wrote last week, many of the country’s oil refineries are located along the coasts of Texas and Louisiana. The latest reports indicate that more than 10% of U.S. refining capacity is now offline because of flooding and closures of shipping channels, roads and railways.

Retail gasoline prices are already starting to show the effects of refinery outages. According to AAA, the nation’s average price for regular unleaded now stands at $2.38 per gallon, up 4 cents from a week ago. Gasoline futures contracts are showing even steeper gains, signaling that drivers can expect prices at the gas station to keep rising in the next few days.

Jason Schenker, chief economist at Austin, Texas-based Prestige Economics, thinks the Gulf Coast region and the Northeast are especially likely to see prices jump, since much of the Eastern Seaboard depends on fuel refined along the Gulf. The effect on the West Coast should be muted. All told, it could be a “matter of weeks” before refineries are operating normally, he adds.

The only good news for the region’s energy industry: Refinery damages seem to be moderate. Jenna Delaney, senior oil analyst at PIRA Energy, an analytics unit of S&P Global Platts, said there aren’t reports of “anything particularly severe” at Gulf Coast refineries yet. The challenge is one of logistics more than repairs, she says. As long as key shipping routes, such as the Houston Ship Channel and the Port of Lake Charles in Louisiana, are closed, refineries can neither receive crude oil shipments nor send out refined fuels. Harvey must exit the Gulf and local officials need to assess the damage before establishing a timeline for reopening key waterways, she says.

Refiners not affected by the storm stand to benefit in the short term from the widening gap between the price of the crude oil they buy and the price of the gasoline and other fuels they sell. Benchmark U.S. crude is down since Harvey formed last week, recently trading at $46 per barrel on expectations that refinery closures will depress oil demand. Nymex-traded gasoline futures, meanwhile, have risen from less than $1.60 per gallon to $1.75 per gallon.

Prestige Economics’ Jason Schenker reckons that the price gap won’t last long. Once all refineries are operating normally again, they’ll be heavy buyers of crude, which should be bullish for oil prices while increasing gasoline supplies. But that probably won’t happen soon enough to avoid a noticeable price increase for folks driving this Labor Day weekend. The national average gas price, now at $2.38 per gallon, could flirt with $2.50 per gallon during the long weekend.