As Hurricane Harvey moves away from Texas after bringing catastrophic floods across the Gulf Coast, including Houston, we are keeping its residents in our thoughts. While those affected are the first and foremost on our minds, we are also monitoring Harvey’s impact on the energy and real estate markets, and the broader economy, since Houston is the fourth most populated city in the United States and accounts for approximately 3.1% of domestic GDP, according to the US Bureau of Economic Analysis.
The impact on the overall domestic economy will not be known for some time although initial estimates from RSM and Citigroup indicate that the drag on third-quarter GDP will be around 10 basis points to 30 basis points. Similarly, the cost of repairing and rebuilding the region is equally hard to pin down at the moment; estimates have ranged anywhere from $75 billion to over $200 billion.
Houston, the “Energy Capital of the World,” houses thousands of energy companies. More importantly, the greater Gulf Coast region is home to a major part of the refining and storage facilities for the US energy industry. To this end, we are monitoring the storm’s impact on the energy sector and the domino effect it will have on gasoline prices and other commodity prices in the coming weeks and months.
The largest hit from the storm has been in the midstream and downstream parts of the energy value chain, while the impact on the upstream exploration and production (E&P) sector appears to be minimal relative to past disruptions. The Gulf of Mexico offshore production capacity appears to have been relatively unscathed, and onshore production across Texas and the Gulf Coast remains largely online with modest delays to new production activity likely to occur.
The Gulf Coast region accounts for roughly one-third of the total refining capacity for fuels consumed domestically, and approximately 20% of all US refined product capacity is currently offline or running at reduced capacity because of the storm, including the largest oil refinery in the country. Given the slowdown in refining activity and the location of the pipelines feeding the region, volumes have slowed or stopped within the midstream complex in the area. The amount of damage to this part of the value chain remains to be gauged; the time it will take to ramp up is also unclear and depends largely on the refining and processing recovery.
The most noticeable impact will likely be at the pump amid a probable uptick in gasoline prices in the coming weeks. So far this week, oil prices had a subdued response due to the higher than average storage. However, AAA is reporting that nationwide average gas prices are, on average, 10 cents higher than a week ago on the back of Colonial Pipeline, which delivers gasoline and other refined products to the Northeast from the Houston and Gulf Coast areas, shutting down.
Ahead of Thursday, oil prices had actually weakened and were expected to remain soft since the demand for crude oil is lower due to less refining capacity. The missive from the US Energy Department likely played a role in the increase in oil futures this morning.
Historically, natural gas prices have spiked when large storms, such as Rita and Katrina, have hit the region. That said, they are not expected to have much of an impact on gas prices because of the amount of supply that has come online, especially in Appalachia, in the 12 years since those storms.
On the real estate front, most of the damage observed to date has been from the record floodwaters (as opposed to wind damage), with the worst of the flooding occurring in central and south Houston. The extent of the damage may not be known for quite some time, as some properties are likely to remain inaccessible for at least several more days. Commercial real estate insurance should cover the majority of costs associated with structural and physical repairs due to flooding damage. In many cases (though not all), investment managers will have business interruption insurance that covers potential lost rental revenue due to an asset being “offline” or inaccessible by tenants. Houston is the ninth largest metropolitan statistical area (by market value) in the NCREIF Property Index, accounting for approximately $20.6 billion in market value (or about 3.8% of the overall index).
We are also tracking the environmental impact on the area following the overnight explosion caused by the flooding at the Arkema chemical plant near Houston. There are many sites in the region that may have had dangerous spills or leaks and the effects of this remains unknown over the longer term. There is a great deal of uncertainty regarding the recovery and the pace at which the damaged infrastructure can be repaired to resume normal operations. We will continue to monitor the situation and keep our clients apprised of the developments.