Sunday 24 September, 2017

Hurricanes vs the Global Energy Industry

Hurricane Harvey has devastated the southern regions of the United States as well as the Gulf of Mexico, and the environmental and social impacts are being broadcasted heavily over all forms of the mass media.

However, there are much more negative impacts than just human lives, infrastructural damages, loss of homes and damage to the environment. Weather systems affect the global energy market both directly and indirectly.

Texas is referred to as “the energy heartland” of the United States, which means that Harvey would not only affect exploration but production as well. Offshore drilling in the Gulf of Mexico accounts for 17 percent of the United States’ crude oil production, and the Gulf Coast has 45 percent of its refining capacity.

In preparation for Harvey, it was estimated that platforms accounting for 22 percent of oil production and 23 percent of natural gas output in the Gulf, had been shut down.

So, the question now stands, how exactly did Hurricane Harvey affect not only the domestic energy market in the U.S. but the international energy market as well.

- Companies such as ExxonMobil reduced their output at their platforms in the Gulf, while other companies such as Royal Dutch Shell and Anadarko Petroleum evacuated employees from their platforms. This resulted in a shutdown of operations.

- Damages to infrastructure coupled with flooding lead to prolonged power outages, which puts a further dampening on operations and production.

- Domestic gas prices were expected to increase between 5 to 25 cents (US Dollars) per gallon, since there was a spike in demand, in preparation for the storm, and a decrease in supply as a result of refineries being shut down.

- Shipping terminals along the coast have also been shut down in preparation for the storm. Ports have been closed, which means that the transportation of energy commodities would be near impossible. This would obviously result in the rates for carrying freight, to rise.

- The Gulf Coast has seen an enormous increase in shale oil production over the past decade. In theory, these shale oil facilities have been built to withstand coastal flooding, this hasn’t been tested since many small oil companies built up their operations along the coast with haste.

It is evident that these effects are negative but is this necessarily a bad thing?

Yes, the cut in production means less output, and the halt in operations means many people would not be able to earn a living, but according to the law of supply and demand, when supply is cut, demand for commodity increases, therefore driving up the price of the commodity.

Currently, based on the state of the global economy, a spike in energy commodity prices is a good thing, especially for a country like Trinidad and Tobago whose economy is fossil fuel based. Higher prices mean that countries are now able to earn more revenue and boost their economies.

The domestic prices within the United States have already risen, can we now expect a similar pattern to occur on the global energy market?