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Nick Butler: The Energy Lessons Of Hurricane Harvey

Nick Butler, Financial Times

The most important lesson for the energy sector emerging from Hurricane Harvey is that the key issue of energy security is no longer physical shortages of fuel supplies but the quality of the infrastructure system that takes energy to the final consumer.

Consider what happened in the days after the hurricane hit Texas (These facts are taken from the daily market summary produced by S&P Global Platts.)

  • A week after the event 19 refineries were wholly or partially closed. The rough estimate for the volume lost is some 3.2m barrels a day.
  • Some 100,000 b/d per day of oil production and 270m standard cubic feet a day of natural gas production from the Gulf was shut in.
  • Crude oil prices fell in the immediate aftermath of the flooding because the closed refineries stopped buying crude.
  • Gasoline prices spiked by up to 10 per cent because the refineries were unable to keep producing.
  • Two weeks on some of these effects are still obvious. Overall, however, the market has adjusted remarkably quickly. Production and refinery throughput is gradually being restored. Prices have settled back.

Hurricane Harvey was a human tragedy with at least 60 people killed and thousands forced out of their homes. But it has not produced an energy crisis. The US system has proved to be remarkably resilient. Other countries need to learn from what has happened.

Harvey is a sharp reminder of how much has changed in energy security. There was no shortage of crude oil — in the US or at the global level. The market is well supplied. Despite the Opec production quotas, and the problems in Libya, Nigeria and Venezuela where output is running below capacity, supply easily covered the shortfall in the US. If, as David Sheppard wrote in the FT last week, the US Federal authorities held stocks of refined products as well as crude there would have been no break in supplies at all.

But other issues can pose a challenge to the flow of supply that consumers take for granted. Primary sources — the raw materials — need to be processed and converted into forms of energy that can be used by consumers. Crude oil must be refined into gasoline or other products, gas or coal converted to electricity. And the lines and grids must be in place to take energy from the point of production to the point of consumption.

This aspect of energy security tends to be ignored — because we are in an age of plenty. The last two weeks have shown that security of supply means more than being able to withstand embargoes or politically motivated cuts in supply. The breakdown of infrastructure is far more of a risk.

The US seems well able to cope. A century and more of development, helped recently by the growth of the shale business, gives the US a diversified network of supplies linked by a web of lines carrying crude, products, gas and electricity. Although the refinery business is concentrated around the Gulf coast, there are enough sources of products to cover temporary shortfalls.

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