Hurricane Irma was seen to be the most powerful tropical cyclone (or hurricane) to have struck the United States ever since Hurricane Katrina in 2005. It hit Florida on 10 Sept 2017 as a dangerous Category 5 hurricane and had knocked out power to more than 6 million Florida homes and businesses. Its predecessor, Hurricane Harvey which happened in late August, had already shut down a quarter of the U.S. refineries and 8 percent of U.S. oil production. The disruption of more than 4 million barrels per day (bpd) of refining capacity have also been cut in half. No doubt, oil demand is bound to decrease in the immediate run and that is not unpredictable at all. Homes no longer require power, at least not in the near future, neither do cars when their city has been put under water.
With supply and demand falling at the same time, it is not surprising that oil prices would fluctuate in an uncertain manner. In fact, having understood the price elasticity of demand and supply for oil, one may think it is for the better as this could mean that oil prices may have hopes of rising with lesser the quantity demanded. However, about half of the shuttered refining capacity along the Gulf Coast could be back up and running at the time of writing. This includes Motiva Enterprise, the largest U.S. refinery of 600,000 bpd of oil capacity, which have restored its crude distillation to a minimum production level of 325,000 bpd. The oversupply of U.S. crude is likely to persist even though an estimated 1.4 million bpd could still be down for the next two weeks. Oil prices would continue to fluctuate in the short run and is likely to rise again as recovery efforts pick up.
The Aftermath Effects
Natural disasters often have significant implications on public expenditure. In order to meet the costs of repair and restoration of public infrastructure and to provide relief aid to those affected, governments are often likely to result in a portion or additional expenditure of the financial resources that were previously committed. Hurricane Harvey and Irma have caused between $150 billion and $200 billion in damage to Texas and Florida, according to a preliminary estimate from Moody’s Analytics on 11 Sept 2017. These include homes and furnishings, vehicles, commercial estates, and public infrastructure. As at 12 Sept, the storm is still hitting Georgia, Alabama, and the Carolinas. The extent of the damage is uncertain, but what is certain is that more businesses are going to be disrupted, more people are going to be unemployed and more agriculture are going to be destroyed.
As with most natural disasters in recent years, insurance money and government aid flows to affected regions which means government revenue is likely to fall. Consumer and investment expenditure in affected regions are bound to decline as well. U.S. may face monetary pressures to increase its money supply, either through borrowing domestically or tapping on its foreign reserves. The former puts an upward pressure on interest rates resulting in a credit squeeze while the latter implies a capital influx which would bring about an appreciation of the U.S. dollar. Interest rates affect economic growth and a higher dollar would eventually cause the overall net exports to decline, impacting economic growth as well.
Of course, post-disasters investments may result in high levels of economic activity as repair and restoration also provide opportunities for the essential but neglected repair and upgrading of amenities. This recovery period may take months and even years in the areas that were hit the hardest. For now, the challenges that lies ahead for the U.S. to take up includes minimizing its economic and financial losses, ensuring that its affected citizens receive priority support without falling into poverty, and to encourage economic recovery without significant delay. For all that to happen concurrently, is unquestionably a tall order to take on.