The Industrial Impact of Hurricane Harvey

As the Houston community starts to recover from the effects of Hurricane Harvey, let’s look at the storm’s impact on industries tied to the area. Harvey has brought an unprecedented amount of rain and serious flooding to Texas, and some of the immediate business impact is already clear.

Oil and Gas

Motiva Enterprises has shut down the country’s largest refinery, PAT, until flood waters recede. In total, around 20 percent (3.5 million barrels per day) of U.S. refining capacity has stopped because of Harvey, and around 20 percent to 25 percent of crude oil production in the area has been temporarily halted. Those numbers have the potential to increase as Harvey made its second landfall yesterday.

The closings have had a short-term impact on gasoline prices around the country, with markets around the U.S. seeing a 5 to 10 percent price spike.

Experience from past major storms, including Katrina, Rita, Ike, and Isaac, suggest that the effects should be relatively short-term, with prices returning to pre-storm levels within a month. One caveat: If flooding continues for a sustained period, physical damage due to soil and ground instability could lead to a longer impact on U.S. refining capacity, and therefore on gasoline and diesel prices.

Petrochemicals and Resins

Close to 50 percent of U.S. ethylene production has been temporarily shuttered. 80 million pounds of daily polyethylene capacity is offline. Nearly all resin producers in the Houston area have been shut down due to safety, as flooding makes plant visits risky.

Multiple suppliers, including INEOS, Formosa Plastics, and LyondellBasell have declared force majeure on both polypropylene and polyethylene resins, and more suppliers are expected to join.

We expect short-term price spikes in the key olefin (ethylene, propylene) and polyolefin (polyethylene, polypropylene, and their derivatives) markets.

As long as the outages are temporary, due to feedstock and safety concerns, we don’t anticipate long-term market impacts. But if longer-term damage affects production assets, the impact could spread.

Energy Infrastructure

Although images from the Houston area show that the immediate impact of Harvey has been crushing, we don’t anticipate any long-term impact on the major crude oil, petroleum product, and petrochemical distribution infrastructure in the Gulf Coast area.

Based on past experiences, we expect all major infrastructure modes (sea, rail, pipeline, and road) to be operating at full capacity four to seven days after flood waters recede.

Shipping

The Port of Houston closed on Friday and is expected to stay closed for the next few days. About 80 vessels were sent out to sea by noon Friday. Currently, there’s not much damage to the port facilities, but damage to channels from currents will be evaluated once the weather clears.

The backlog will be worked out within the next couple of weeks. The port usually sees 40 to 50 calls per day, and right now there is no official estimate for how long it will take to get through the backlog of vessels. Currently, cruise ships are restocking and refueling in New Orleans and have missed most of the bad weather.

Rail has shut down due to flooding and resulting damage to rail lines. Rail companies are stating it will take 96 hours after flood waters recede to fully examine the rails.

Once the weather clears, there will be a big push of food, water, and building materials into the area. We expect to see a spike in reefer and dry van rates over the next few weeks. In addition, the recovery will put more pressure on flatbed shipping, and pricing will likely increase significantly in that part of the market for the medium term.

While early days, the outlook is for the U.S. logistics and manufacturing sectors to once again demonstrate their resilience in responding to catastrophic events. For many leading companies, investments in supply chain visibility and contingency / business continuity planning are paying off. For those who have not yet taken similar steps, this may be the opportunity to revisit that business case.

Sean Monahan is the lead partner for A.T. Kearney’s Operations practice group, an author of the State of Logistics Report, and a World Economic Forum strategic partner focused on the Future of Production. Many thanks to colleagues, particularly Josh Brogan, John Moyer, Neal Walters, Yves Thill, Vincenzo Sposato, and Jordan Hesterman who contributed their insights.