Record Refinery Performance Lends Confidence for Hurricane Season
Posted August 16, 2018
As we head into what historically is the heart of the annual hurricane season, America’s refiners have never been in a stronger position to deliver the fuels we all need – which is good news for consumers.
According to API’s Monthly Statistical Report (MSR), the refining industry in June eclipsed 18 million barrels per day (b/d) of liquid fuels processed in distillation units and has remained on track for its strongest year on record.
Indeed, the U.S. Energy Information Administration forecasts that refinery runs will average 16.9 million b/d this year and 17 million b/d in 2019 – both of which would be records, surpassing the 2017 annual average of 16.6 million b/d.
Remarkably, with one-third of U.S. refineries closing since 1990, capacity at existing refineries has expanded by nearly 20 percent, thanks to the industry’s continued incremental innovations and investments.
Again, this is solid news in hurricane season. When hurricanes approach, fuel prices and availability become the top thing on most people’s minds.
API doesn’t forecast prices, but we have observed that in the past major storms have impacted prices – depending on when and how hard they hit, whether the public was caught by surprise, and the extent to which energy industry infrastructure is affected.
To see this, consider the following chart, which compares gasoline prices before and after five major hurricanes that hit Florida and Texas. Prices are indexed by their percentage changes two weeks before and up to four weeks after each storm hit.
Hurricanes Harvey and Katrina caused significant flooding that affected the ability to produce, refine and transport petroleum fuels. Both storms resulted in the loss of more than 30 percent of the United States’ refining capacity. Consequently, Harvey and Katrina had the largest impact on gasoline prices and shared similar patterns, where prices spiked by more than 10 percent within a week and took more than a month to come back down. By contrast, severe hurricanes Ike, Irma and Matthew raised prices to a lesser extent. Prices after Ike and Irma reverted to (or below) their starting points within a week, while those after Matthew came back down within three weeks.
Frequently, I’m asked why prices tend to rise and fall as they do. The answer is rooted in human and economic behavior. Although it’s advisable to follow a regular refueling schedule, as a storm approaches many people invariably rush to fill up their vehicles with fuel. In the relatively extreme case of hurricane Irma, for example, millions of people had evacuated, so demand for fuels spiked. Most service stations were emptied within days, as the fuel that normally was stored at service stations was effectively being stored in individuals’ vehicles.
When demand suddenly rises and there’s an urgent need to re-supply stations, there are additional transportation costs involved to bring fuels from other areas that are not usual sources of supply. Moreover, if electric power, petroleum refining or transportation systems are impaired by a storm, typical fuel supply availability may be reduced. Historically, prices have tended to rise under these circumstances and, in doing so, have attracted much-needed supply from other regions. For example, following Irma, trucks delivered fuel to Florida from Georgia and Tennessee.
The government and the petroleum industry constantly assess their capabilities to supply fuel before and after a hurricane – and develop ways to mitigate potential disruptions. When hurricanes and tropical storms disrupt markets and industry operations, resupplying emergency responders and consumers is a top priority.
For example, state and federal fuel regulations may need to be waived to allow gasoline that meets specific environmental requirements to be used in a different state or region where that fuel is not normally allowed. For more detail, API has assembled the following fact sheet to help consumers understand the interconnected U.S. fuel supply system and what happens when major hurricane shocks supply or demand.
The hurricane season technically runs from June through November, but tropical storm formation can begin a month earlier. Based on the 30-year average from 1981-2010, an average hurricane season includes 12 named storms and six hurricanes, with three of those being major hurricanes — that is, category 3 to 5 on the Saffir-Simpson scale. The good news is NOAA just lowered its forecast for Atlantic storms below what it projected in May.
Even so, the government and industry are preparing for the hurricane season – to help minimize supply disruptions and to protect vital energy infrastructure. Individuals can prepare, too. As a recent South Florida resident, let me offer a few suggestions:
- Get your home and supplies ready for the hurricane season, before there’s urgency to do so. Make sure your auto and home insurance is up-to-date – and add flood insurance if needed.
- If you anticipate sheltering in place, start getting everything needed to do so safely. If you need propane for your grill, keep an extra tank on hand.
- Properly service your vehicles (oil change, tire pressure, maintenance) and any home back-up generator (change the oil and make sure it will start!)
About The Author
Dr. R. Dean Foreman is API’s chief economist and an expert in the economics and markets for oil, natural gas and power with more than two decades of industry experience including ExxonMobil, Talisman Energy, Sasol, and Saudi Aramco in forecasting & market analysis, corporate strategic planning, and finance/risk management. He is known for knowledge of energy markets, applying advanced analytics to assess risk in these markets, and clearly and effectively communicating with management, policy makers and the media.
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