Hurricane Harvey made landfall in Rockport late on Aug. 25 as a Category 4 hurricane, strongest storm to hit the United States since 2004. Although the weather system was soon downgraded to a tropical storm, the record-level torrential rains caused devastating flooding and damage in Houston and the surrounding areas. Federal officials have estimated 30,000 people will need to seek refuge in shelters and 450,000 will require some sort of disaster assistance, but those numbers have to be regarded as preliminary.
Since Houston is a major hub for the energy industry, a lot of focus has been on how Harvey will impact oil and gas. The Texas Gulf Coast region is home to nearly a third of the nation’s refining capacity. At least 10 facilities in the Houston and Corpus Christi areas have shut down and others are running at less than normal capacity because of the storm, sidelining at least 2.2 million barrels per day of refining capacity.
While refineries can typically reopen in a week or two after a major storm, some were shut down for months after Hurricane Katrina. Damage to equipment from flooding could lead to closures for weeks or even months. Many of the employees who live in the area have either evacuated or are unable to travel due to local flooding, which could also delay reopenings.
Around a quarter of the oil and gas production in the Gulf as well as major pipeline systems are also offline. The combination of lower refining capacity, production and transportation through pipelines has the possibility of significantly disrupting the supply of oil and gas in the region and even as far away as New England. The price of gasoline is rising, with some analysts expecting an increase of up to 25 cents per gallon in the coming weeks. However, the price is not likely to remain elevated for an extended period once facilities come back online.
In terms of residential damage, an unprecedented number of people have been affected by the floodwaters, not to mention those whose property was damaged due to heavy winds. The major problem with the widespread flooding is that most of these houses do not have flood insurance. Normal home insurance plans cover wind damage but not flood. Flood insurance is offered by the National Flood Insurance Program, which is run by the Federal Emergency Management Agency. According to the Insurance Information Institute, only 15 percent of residents in Harris County have flood coverage. Also, the program already has a deficit of well over $20 billion, partly because of past disasters such as Hurricanes Katrina and Sandy. Those without flood insurance will have to apply for grants or low-cost loans, but resources could be limited and funds could be severely delayed due to the volume of claims and intransigence in Washington.
It also will take a while for local businesses to come back online. United Airlines expects to lose at least $265 million due to grounded flights because of flooding. Other airlines also project losses due to closure of both Houston airports, which led to more than 1,400 flight cancellations on Aug. 28. Other businesses in the area will have to repair facilities and wait till roads are clear. A long path to recovery looms for the entire area.
The impact of Hurricane Harvey is clearly going to be catastrophic. The best estimates to date (from AccuWeather and the National Climatic Data Center) place the damage at $160 billion, but it’s much too early to know for sure. If that amount is close to the final number, it will be the costliest storm in U.S. history.
While human considerations are obviously paramount, from an economic perspective the immediate costs will be from widespread property damage and business interruptions, which could affect areas beyond the Gulf Coast region. For example, in addition to petroleum, the Gulf Coast ports are a critical node for agricultural products, steel and many containerized products. The supply chain of our highly integrated economy will be temporarily compromised.
Despite the devastation, the fundamental factors driving the growth of the Gulf Coast remain intact and our economic institutions are strong. The area will take a sizable hit but will resume its expansionary pattern in the near future. When all is said and done, the overall economy will be just fine. For now, let’s focus on the victims and the human tragedy that demand a proper public and private sector response.