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Harvey throws energy markets into turmoil

DUBAI: Natural disasters always concentrate the economists’ mind, but Hurricane Harvey — and the even more damaging tropical storm version that deluged Texas last week — has thrown into sharp relief the revolution that has occurred in global energy markets over the past decade.
Global energy experts are still analyzing the ongoing fall-out from the disaster, nowhere more so than in Saudi Arabia, where the big Motiva refinery in Port Arthur, owned by Saudi Aramco was directly affected. Saudi and OPEC — attempting to reverse persistently low oil prices — will also be studying the broader lessons to be learned from a catastrophe in one of the big energy hubs of the world.
When the last big disaster hit the Gulf of Mexico — Hurricane Katrina in 2005 — boom-time US was importing more foreign oil than at any time in its history. By the time Harvey made landfall last month, the US had become a big exporter of crude oil and refined products. The shale revolution had turned the world energy model on its head.
That is why the reaction of global energy markets has been so confused in the days since Harvey hit. With crude carriers unable to land at Gulf of Mexico ports, refining capacity dramatically reduced and fuel pipelines to the rest of the country closed, you might expect crude prices to head inexorably upwards.
Instead, the oil price has fluctuated wildly: Nudging up when the hurricane approached land, then falling sharply when the rains came, before recovering at the end of last week. Brent crude closed the week roughly where it was before the hurricane struck. Circumstances have radically altered, and nobody is quite sure how it will play out in the energy markets.
For a while, some commentators thought the repercussions might even spread to the wider American and global economy. Certainly, Harvey was big enough to have some macro-economic effect.
Katrina in 2005 left a $160 billion hole in the US economy, and while Harvey’s eventual cost looks to be smaller than that — the highest reliable estimate so far is $108 billion for Harvey — it will still impact US production, consumer and employment figures for a couple of months. In global terms, Harvey will be nowhere near as costly as the 2011 earthquake in Japan that is estimated to have hit the country’s economy for $200 billion.
But it will not be devastating outside the south Texas vicinity. “Hurricane Harvey is a national tragedy, but the impact on the national economy will be minimal,” was the verdict of Paul Ashworth, chief US economist at consulting firm Capital Economics. “The ultimate burden often falls on large global reinsurers, most of which are based in Europe,” he added.
The US equity markets seemed to shrug off any macro effects from Harvey, with August ending the fifth successive month of rising indices on Wall Street.

‘The storm is a national tragedy, but the impact on the national economy will be minimal,’ analyst says.

Frank Kane

But, the experts agree, the effects on energy markets will be more significant. “We now have ripple effects that are significantly deeper and potentially more disruptive for the energy system than had previously been the case,” said Ed Morse, energy economist at Citibank.
This disruption is unlike any other in history. In the past, the risk has always come from threats to oil supply, usually in the Arabian Gulf, and usually because of security issues in the region. Wars with Israel and Iraq over decades have invariably been accompanied by threats to supply from the biggest oil producing region in the world, and subsequent price spikes.
There is a supply threat this time, but it is not as significant as in the past. Some of the US shale fields — like the Eagle Ford area of Texas — have been hit in the aftermath of the hurricane, but these are not the most important shale production areas in America. These are concentrated much further north and east of Texas, well out of the hurricane path.
The big casualty from Harvey has been the refining and supply industry in Texas, underlining the state’s central role in the American energy industry. It not only produces crude but, with neighbor Louisiana, acts as the hub for refining and distribution of oil products throughout the US.
Latest estimates are that about 30 percent of American refining capacity is down, overwhelmingly in the Southwest. Saudi-owned Motiva, the biggest in the country, is unable to give a date when it can restart operations, according to official spokespeople reported in the local press.
Equally damaging for the economy and consumers, the arterial Colonial Pipeline, which carries petrol products from the Gulf of Mexico to the east, also shut down last week due to flooding.
As a result, petrol pump prices are rising — they hit a two-year high last week, up 30 percent from pre-hurricane levels. Some petrol stations were reporting they had no petrol at all. The cost and disruption to US consumers and industry will be significant.
The closure of refineries also presents a significant problem for crude oil exporters like Saudi Arabian and the other Arabian Gulf countries. With port facilities damaged and refineries closed, they are simply unable to take more crude imports. US storage tanks are already full of shale oil.
This is an unprecedented situation in world energy markets. There is a glut of crude on the US market, but it will be difficult for it to get distributed, refined and sold in the near term at least.
Saudi Arabia and other exporters will not be able to profit from rising pump prices as long as the refinery and supply shortages last.
Saudi Arabia had already been trying to attack the shale-induced glut in the US by cutting crude exports there and looking at other markets, in China and other parts of Asia. The effects of Harvey will only accentuate that trend.
By weakening the link between price, supply and demand, the hurricane and its aftermath will also add to the variables OPEC must consider as it struggles to hold supply caps, and push up global crude prices. 
“The US becoming a major supplier (of energy products) was supposed to reduce volatility,” Citibank’s Morse told the Wall Street Journal. “It actually adds volatility to the market.”