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What Hurricane Harvey Means For The Economy and Your Portfolio

Hurricane Harvey ravaged the Gulf coast., taking lives,
flooding homes and tearing up infrastructure. Texas was the
second largest contributor to the US GDP after California in
the first quarter of this year, and this calamity will have far
reaching economic consequences for both governments and private
investors.

The Macro Economic Impact

Houston and its surrounding metropolitan area is an important
business center. According to the Bureau of Economic Analysis
(BEA), in 2015, the Houston- The Woodlands- Sugar Land area was
the fourth largest metro area in terms of Gross
Domestic Product (GDP),
accounting for nearly $500 billion worth of output. That made
it responsible for nearly 3% of the country’s GDP that year.

The Financial Times reported that researchers from JP Morgan
pegged the physical damage from Harvey between $10-$20 billion
and the GDP impact at 0.1 percentage point. Those from Goldman
Sachs were reported to estimate the economic impact at 0.2
percentage point of the GDP.

But understanding the GDP impact is complex. There are both
short-term and long-term issues to consider. While the
devastation will impair business and economic activity in
addition to the losses in the short term, over the longer term
repair and reconstruction could absorb some of the negative
impact.

That was true for disasters like Katrina and Harvey is unlikely
to buck that trend.

“To be sure some of the negative hit to growth will likely be
offset by a boost to construction spending as rebuilding
efforts get under way. Hence, this unfortunate event will not
likely affect the overall trajectory of the economy or monetary
policy,” said Deutsche Bank economist Brett Ryan, as quoted by Yahoo Finance.

Industry Specific Impact

Texas is the largest contributor to the U.S. oil and gas
industry. Many of the nation’s largest refineries are located
in the state, and Texas has drilling sites both inland and
offshore. As hurricane Harvey lashed the state, many facilities
were forced to shut down and many others forced to operate at
reduced capacities.

According to the U.S. Department of Energy (DOE), as of
August 30, nearly 18% of oil production and 19% of natural gas
production in the Gulf of Mexico (offshore) were shut because
of the inclement weather. Over a 100 manned platforms and 5
rigs were evacuated. Onshore production also suffered in the
range of 300,000 -500,000 barrels a day.

Ten petroleum refineries including the nation’s largest owned
by Motiva in Port Arthur, Texas were forced to shut down. These
refineries have a combined refining capacity of over 3 million
barrels a day accounting for 31.7% of total Gulf Coast refining
capacity and 16.6% of total U.S. production, according to the
DOE.

According to S&P Global Platts, other facilities
forced to shutter operations include Exxon Mobil’s (XOM) Baytown and
Beaumont Refineries, Valero Energy Corp.’s (VLO) Corpus
Christi and Three Rivers plants, Petrobras’ Pasadena, Tx unit
and Shell’s Deer Park, Tx refinery.

Image courtsey: U.S. Energy Information Administration

In its latest update, the DOE said that some refineries had
begun to restart their operations but it could take up to
several weeks for them to return to their pre-hurricane
operation levels depending on the extent of damage.

Shipping & Transportation

Texas is also home to some of the country’s busiest and largest
ports by cargo tonnage. In 2015, Texas ports handled 563 million tons of cargo, nearly
22% of all U.S. port tonnage. Houston (2nd), Beaumont (5th),
Corpus Christi (6th) and Texas City (15th) were ranked among
the Top 50 U.S. ports by the U.S. Army Corps of Engineers.
Heavy rain crippled the ability of these ports to allow ships
to offload their cargo. The DOE report revealed that by August
28, 2017, 22 oil tankers carrying more than 15.3 million
barrels of crude oil were unable to offload it due to port
closures.

Flooding has also disrupted freight transport through road and
rail. This could translate into delays and more importantly
higher truckload rates per mile.

Insurance

As the extent of damage that hurricane Harvey has left in its
wake starts becoming clearer, estimates of insurance costs have
begun to emerge. While Insurance Council of Texas spokesperson
Mark Hanna pegs the insurance loss figures close to
the $12 billion seen for Hurricane Ike in 2008, JP Morgan
analyst Sarah DeWitt estimates the figure to be closer to low
single digit billions. (See also:
Hurricane Harvey Could Cause Havoc for Insurance
Companies
.
)

According a Marketwatch
report
, an analysis conducted by research firm CreditSights
puts State Farm at the top of the list of insurers exposed to
risks from Harvey based on direct premiums of homeowner’s
insurance policies written in 2016 for Texas, followed by All
Corp. (ALL) , Farmers
Insurance, USAA and Liberty Mutual Insurance. CAN leads the
pack for commercial insurance premiums.

All State stock was down over 3% August 24 through August 30.
Historically however, it is the reinsurance companies that
typically bear the brunt as insurance companies pass on their
losses.

Personal Finance Impact

For people such natural disasters are not just a harrowing
physical and psychological ordeal but can also be financially
devastating. Research conducted by University of Illinois College
of Law professor Robert Lawless suggests that hurricanes have a
direct impact on personal bankruptcies. In fact, over the
course of three years since the hurricane, states that have
seen landfalls have also seen bankruptcy filings increase by
over 45% on average.

The hit on personal finances is harder for people without
adequate insurance and that could be a big factor in case of
hurricane Harvey. As of june 20, 2016 in Harris County, the
region that includes Houston and was the hardest hit, only 15%
of homes had flood insurance policies according to Federal
Emergency Management Agency (FEMA) data. The number of flood insurance policies in
place has been on a decline in four out of the past five years.

Harvey will pinch the pocketbooks of people outside the
southwest when they stop to refill their car gas tanks. A drop
in supply has ensured that gas prices are on their way up. How long this trend lasts will
depend upon how quickly the damage to refineries can be
assessed and operations resumed.

Federal Government Impact

Not only does inadequate flood insurance hurt people whose
homes the hurricane has destroyed, it also puts pressure on the
National Flood Insurance Program. The program makes loss
payments to those that do not have flood insurance and often
borrows from the Treasury Department to meet its claims
obligations.

However, the U.S. Government Accountability Office (GAO) had
earlier this year classified the program as high risk as
it feels that the program will not be able to generate revenue
in order to repay what it has borrowed.

“As of March 2016, FEMA owed the Treasury $23 billion, up from
$20 billion as of November 2012. FEMA made a $1 billion
principal repayment at the end of December 2014—its first such
payment since 2010,” said the GAO.

Investing Impact

The stock markets have barely reacted to the Harvey news and
seemed more worried about North Korea’s missile tests. As far
as individual stocks are concerned, oil and gas stocks like
Exxon and Royal Dutch Shell (RDS.A) saw some movement but have
remained largely flat between August 24 and August 30 while
shares of Valero Energy have increased close to 1.5%
potentially on the back of higher gasoline prices.

CNBC’s Jim Cramer points out that looking back, insurance
stocks may take a hit over the short term but over the medium
term as companies pass on the costs to reinsurers and seek to
rates, such disasters could spell significant upside. Within
three months of Hurricane Katrina in 2005, stocks such as
Progressive Corp. (PGR)
jumped 27% while Chubb Limited (CB) rose nearly 25%.

Despite the production shutdown and the delay in import
arrivals, crude oil prices have not rallied. Some analysts
believe it could be an opportunity for shale producers to
pounce.

“Although crude is affected in that area it also puts the focus
more on being able to produce the oil through the shale. Shale
is a big effect. That’s one reason why crude isn’t rallying as
much,” said Howard Marella, President, Icon Alternatives, a
futures investing firm. “There’s an alternative to that
drilling, we could get crude through shale now. The shale
production could increase considerably now which would give us
a longer term outlook on how well we can much we can put out
through shale per day.”

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