Hurricane Sandy’s Impact on Energy Industry Yet to Be Measured

In addition to infrastructure damage, Hurricane Sandy has forced the idling of about 70% of the East Coast’s oil refineries. This does not bode well for the supply of refined oil products as capacity was already quite tight prior to the shutdowns.

According to IHS Global Insight, supply chain managers are likely to see an accumulation of crude supply and a shortage of refined products in the coming days which will inevitably put upward pressure on gasoline prices. Already, on Monday the November reformulated gasoline blendstock for oxygenate blending (RBOB) gasoline futures price had increased.

The commercial shutdown of the East Coast is likely to result in gross domestic product losses that may outweigh infrastructure damages. And, while some of these losses will be offset by ex-ante “preparation” sales as well as clean-up, repair and reconstruction activity – thus lessening the “observable” GDP growth impact in the fourth quarter – part of the loss in economic activity is permanent (for example spending at restaurants).

Combining all of the above disruptions from Sandy, early estimates point toward total economic losses of around $30-$50 billion.

Derik Andreoli, Ph.D.c., a senior analyst at Mercator International LLC and Logistics Management’s popular Oil & Fuel columnist, said he would expect any price impacts to be relatively small and temporary.

“There are bigger problems, to be sure. The state of the roads is an unknown, and millions are without power. Fuel pumps at gas stations and cardlock facilities don’t work when the power is out.”

Hospitals and other critical service providers will be running on power provided by diesel generators. It is unknown whether the emergency stocks held at these facilities will be sufficient (though I suspect the answer is that these stocks will be sufficient).

The extent of the damage to the oil/fuel supply chain is at this point unknown.

“I suspect that the bulk of the damage was experienced by individual retail stations and cardlock facilities, but there is a lot of redundancy in this part of the system,” said Andreoli. “There should be enough refined fuel stock on hand to manage the post-Sandy rise in demand, which will, of course, be stymied by the sheer amount of damage.”

Over the next week, disaster response will shift to disaster recovery, and this effort will likely drive up demand for distillates (diesel), but Andreoli does not expect that this will have too great of an impact on prices.

In short, there are a lot of unknowns at this point, but unless there was significant damage to the system – and this doesn’t appear to be the case – price impacts should be minimal. There is good news in that the largest of the refineries, Philadelphia Energy Solutions, is already back online, and the Tainter refinery never went offline. The Colonial Pipeline which brings crude and refined products up from the Gulf of Mexico is not fully operational as a consequence of a power outage, but the infrastructure has not been damaged.

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