Hurricane Harvey has already taken an enormous human toll on the Gulf Coast, killing at least eight people and forcing around 30,000 to seek shelter from the unprecedented rainfall. But it’s also devastating American energy production — and people across the US are likely to feel the effects at the gas pump in the weeks to come.
At least 10 oil refinery plants in the Houston and Corpus Christi areas have shuttered in the past few days due to record levels of rain and flooding from Harvey. Given how crucial Texas is to oil refinement for the entire country, that’s an enormous disruption.
“At this moment now, we’re talking about somewhere around 15 to 16 percent of all US refining capacity offline,” Patrick DeHaan, a senior petroleum analyst at GasBuddy, a firm that monitors gasoline pricing, told me.
Refinery plants process crude oil and turn it into usable products like gasoline and jet fuel. With so many refineries shut down, gasoline is growing scarcer, and prices are set to soar for consumers.
DeHaan estimates that in the next two weeks, gasoline prices could increase between 20 and 35 cents percent per gallon in the Gulf Coast region, between 10 and 25 cents per gallon in the Midwest, and between 5 and 15 cents per gallon on the East and West Coasts.
It’s unclear how long it will take for the oil refineries to start operating at full capacity again; it will take weeks at least, according to experts. But if history is any guide, prices should also come down fairly quickly after they peak.
According to PIRA Energy, a forecasting and analytics unit of energy data provider S&P Global Platts, gasoline prices typically return to normal two to four weeks after a crisis-induced peak, like after Hurricane Katrina in 2005.
The price of American oil is actually declining
But while gasoline prices are spiking, the price of crude oil is actually declining — US crude oil futures, publicly traded financial products that reflect wholesale oil prices, dropped more than 3 percent on Monday.
The main reason is that it’s easier to shield oil rigs from hurricanes than it is to protect oil refineries from them.
A great deal of oil production takes place in offshore rigs that are evacuated and go offline in advance of storms but can handle the rain and wind relatively well. They’re built for the water and based in the water, so they’re just not susceptible to being flooded in the same way, and they can return to production quickly.
Oil refineries, by contrast, are based on land. That makes them vulnerable to flooding and costly long-term damage.
“After Hurricane Katrina hit, the disruption to production was short-lived, but damage to refiners was long-lasting — some of them were down for more than a year,” Antoine Halff, a scholar at Columbia University's Center on Global Energy Policy and former analyst at the International Energy Agency, told me.
Many analysts and the market predict that once again, production will resume far more quickly than refining. That means we’re likely to see a huge buildup of crude oil that normally would be processed and turned into gasoline and other products but now won’t have anywhere to go until refineries are back online. The supply of crude oil will temporarily surpass the usual demand, which is what’s sending its price downward.
But there’s another wrinkle: Over the past decade or so, the Gulf Coast has seen an enormous boom in shale oil production — a form of oil production with land-based facilities.
And while those shale oil facilities were theoretically built to withstand coastal flooding, there’s reason to be skeptical. Halff says thousands of small oil companies have built up their operations on the Gulf Coast with extreme haste and they simply haven’t been tested.
“It’s not clear that all that new capacity was built to the highest standards of flood resilience,” he says.
Given the unprecedented nature of the rainfall, floods might overwhelm shale oil facilities and take them offline for long periods of time. If that happens, then the US’s energy challenges may end up being even worse than we thought.