Harvey Update: Price Impacts and the Need for Patience, Consideration
Posted September 6, 2017
The U.S. Energy Information Administration (EIA) reports on rising gasoline prices in the wake of Hurricane Harvey and notes that the storm’s impact on prices is similar to the big hurricanes of 2005, Katrina and Rita. EIA:
Compared with other hurricanes that have made landfall in the United States since 2000, Hurricane Harvey’s impact on U.S. Gulf Coast spot gasoline prices has been on par with the impact from Hurricanes Katrina and Rita. In August 2005, gasoline spot prices rose nearly 30% within one trading day after the landfall of Hurricane Katrina in Louisiana. The gasoline spot price remained elevated for a second trading day before rapidly declining soon after. In September 2005, prices rose by almost 30% within three trading days after the landfall of Hurricane Rita before similarly declining. In contrast, gasoline spot prices remained stable or fell in the days after Hurricane Sandy, which hit the U.S. East Coast, and Hurricane Ike made landfall.
Here’s EIA’s chart, showing the slower rise in regional spot prices after Harvey, compared to rapid spikes after Katrina and Rita:
According to EIA, Harvey’s impact was more moderated than the 2005 storms because refineries in the Houston-to-Port Arthur region started going offline days before Harvey’s landfall near Corpus Christi. Gasoline prices rose steadily for four trading days before starting to decline, EIA reports.
EIA’s report underscores a number of points we’ve been making about the oil supply chain, of which the Texas-Louisiana region is part – especially the section of that chain that shows the path of refined products from refineries to retail outlets. Again, here’s the entire chain in an interactive graphic:
Oil Supply Chain
(Interactive Content Best Viewed on Large Screens)
Modern oil geologists examine surface rocks and terrain, with the additional help of satellite images. However, they also use a variety of other methods to find oil. They can use sensitive gravity meters to measure tiny changes in the Earth’s gravitational field that could indicate flowing oil, as well as sensitive magnetometers to measure tiny changes in the Earth’s magnetic field caused by flowing oil. They can detect the smell of hydrocarbons using sensitive electronic noses called sniffers. Finally, and most commonly, they use seismology, creating shock waves that pass through hidden rock layers and interpreting the waves that are reflected back to the surface.
When a prospect has been identified and evaluated and passes an oil company’s selection criteria, an exploration well is drilled in an attempt to conclusively determine the presence or absence of oil or gas. Five geological factors have to be present for a prospect to work and if any of them fail neither oil nor gas will be present:
- A source rock
- Seal or cap rock
Hydrocarbon exploration is a high risk investment and risk assessment is paramount for successful exploration portfolio management. Exploration risk is a difficult concept and is usually defined by assigning confidence to the presence of five imperative geological factors, as discussed above.
Design and Construct
Although there is some variability in the details of well construction because of varying geologic, environmental, and operational settings, the basic practices in constructing a reliable well are similar. The ultimate goal of the well design is to ensure the environmentally sound, safe production of hydrocarbons by containing them inside the well, protecting groundwater resources, isolating the productive formations from other formations, and by proper execution of hydraulic fractures and other stimulation operations.
The first step in the oil supply chain is production. During production, crude oil is produced on both land and at sea. Oil production includes drilling, extraction, and recovery of oil from underground.
At multiple stages of the oil supply chain process, oil is transported to storage, refineries, terminals, and finally to the point of sale. There are four basic modes of transportation of crude oil from production to the point of sale: trains, trucks, ships, and pipelines.
Once the oil has been produced, it is transported to short-term storage. Short-term storage serves as the staging area for crude oil distribution throughout the entire supply chain. Storage facilities allow for adjustments in supply and demand throughout the entire supply chain. The Strategic Petroleum Reserve (SPR) is an emergency fuel storage of crude oil maintained by the United States Department of Energy used to mitigate supply disruptions.
Refineries act as the main transformation point for all crude oil into various consumer products. After receiving oil from storage facilities, refineries use various chemical separation and reaction processes to transform crude oil into usable products such as: fuel oil, diesel oil, jet fuel, and multiple essential manufacturing feedstocks.
From the refineries, feedstocks are transported to manufacturing facilities where they play a critical part of many manufacturing supply chains, such as medical equipment, plastics, organic chemicals, refined gases, and lubricants.
Refined fuel that is ready for use is transported to terminals. Terminals are located closer to transportation hubs and are the final staging point for the refined fuel before the point of sale. After entering the terminal ethanols and additives are added to the final refined product before fuel is transported.
Point of Sale
Once the refined fuel leaves the terminal, it is transported to its final point of sale, which includes fuel stations and airports. Trucking, shipping, and delivery lines provide the final, finished product which can be delivered across the country.
Worth noting again:
- While nationwide, inventories of crude oil for refining and refined products destined for consumer use are relatively high and could offset storm-related disruptions, depending on infrastructure constraints, the processes and markets that bring fuels to consumers are strongly influenced by the larger forces of supply and demand and specific disruptions in the transportation sector – affecting pipelines, tankers, barges, trucks and rail. To relieve some of the market pressures and to give the best opportunities to move gasoline and diesel to where it's needed, the government has granted certain temporary regulatory waivers.
- Historically, when supplies fall relative to demand, there has been upward pressure on prices. Then, as affected refineries and other infrastructure come back online, prices in the past have tended to moderate.
- Pricing decisions by owners of individual service stations – 97 percent of existing gasoline stations are independently owned – are influenced by supply-and-demand influences in the supply chain above them. They must manage replacement costs for the next tank of fuel that could be nearly 10,000 gallons, which means keeping their street prices competitive and ensuring sufficient cash flow to buy that next tank full.
In Texas, state Railroad Commissioner Ryan Sitton credited industry and state and federal governments for working expeditiously to meet energy needs. A number of energy companies have worked to restore supplies in affected areas, Sitton said, working around the clock to get gasoline from terminals to local service stations.
Amid this cooperation and hard work, consumers have a role to play as well, in which they’re patient and considerate toward others. Sitton said hoarding and panic buying have placed “unnecessary strains” on gasoline supplies in certain pockets of the state and called on citizens to allow the energy supply chain the time to safely return to normal. Sitton:
“This is not an instantaneous process. It takes time but they are making great progress at refueling stations across the state. … All of Texas is rightly focused on rebuilding the areas directly impacted by Hurricane Harvey and assisting our fellow citizens in need. One of the things every Texan can do to help is to fill up if you need to, but not to hoard fuel which is dangerous and hurts everyone else."
What Sitton is saying is that in these days of recovery and restoration, consumers should think and act responsibly, looking to the many terrific examples of the American spirit all around them for inspiration and working together so that processes can move forward for the greater good.
About The Author
Mark Green joined API after a career in newspaper journalism, including 16 years as national editorial writer for The Oklahoman in the paper’s Washington bureau. Previously, Mark was a reporter, copy editor and sports editor at an assortment of newspapers. He earned his journalism degree from the University of Oklahoma and master’s in journalism and public affairs from American University. He and his wife Pamela have two grown children and five grandchildren.
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