FINANCE TODAY | ISSUE NO.06
Hurricane Ida wreaked havoc over parts of the northeastern United States, the Caribbean and South America. Classified as a Category 4 hurricane, Ida caused floods, destroyed homes, displaced people from their cities, and brought major oil rigs to a halt5. Loss of infrastructure and damages to the property during natural disasters such as this one add up to vast amounts of money lost and Ida has now been declared the seventh costliest hurricane to hit the U.S. since 2000.7 With all the economic loss, car and property damage, workers unable to get to their jobs, travel disruptions and the shutting down of tourism; the category 4 hurricane cost about $95 Billion, falling right after hurricanes Ivan and Rita from 2004 and 2005 respectively7.
HURRICANE IDA'S EFFECT ON OIL
While the restoration of property damage and city repair can take up to months, the effects on the oil and gas industry could be longer-lasting. When 240 kph winds hit the Gulf of Mexico, most offshore oil and gas productions had to be shut down8. These offshore wells produce about 1.8 million barrels of oil per day, accounting for 16% of the daily U.S. total9. Numerous platforms and onshore support infrastructure were damaged and repairs will take time. Three days after the hurricane was deemed over, 79.33% or approximately 1.44 million barrels per day of oil production in the Gulf of Mexico remained shut down. A whopping total of over 16 million barrels were displaced from the market in the first ten days of the storm, setting a record of being the greatest initial impact on oil than any storm in history.
Analysts from the Bank of America predict several more weeks until production is back to 100%. Ida has likely set the U.S. behind roughly 30 million barrels for the year in the long run8. Following the cuts in its production, oil prices took a hike shortly after the end of Ida on Wednesday, September 8th and plateaued at more than 1%. Brent Crude settled up 91 cents, or 1.3% to $72.60 a barrel, and West Texas Intermediate up 95 cents, or 1.4% to $69.30 a barrel. These developments had traders closely monitoring the situation and inventory data for hopes of a clearer picture about how soon production would be back to normal9.
THE EFFECT AND PATTERNS OF ECONOMIC BOOM-HURRICANES:
Hurricanes, as time has shown, cause enormous amounts of costly damage: more than any other natural disaster. The 4 costliest Hurricanes in the U.S. since 2005, Katrina, Sandy, Harvey and Irma, amounted to Trillions of dollars in damages1. Certain areas that had a combination of particularly heavy storm activity and low hurricane expertise and resources got hit disproportionately hard, with serious losses to communities, local governments, households and businesses1. Generally, the ways that hurricanes cause damage to the economy revolve around the halting of major facilities. Power lines being down cause eCommerce sectors to plummet, hault online communications, and pose serious risks which may be difficult to recover from2. Tangible inventory can also be damaged for businesses leading to further domino effects with supply-chain interruptions2. Some studies aim to compare the effects of hurricanes on economies to tax increases and banking crises, concluding that one moderate intensity cyclone every few years can slow down an economy at the same rate as a tax increase of 1% of GDP or a currency crisis5. This research aims to enforce the notion that economies have a hard time recovering from hurricanes, but interestingly, there is plenty of evidence to prove the contrary. When analysing major metropolitan areas that were heavily affected by hurricanes within one year following the disaster, average economic activity was either on par with or even stronger than it had been the year before the hurricane. Theoretically, a natural disaster has the potential to bring both positive and negative effects and could technically be beneficial to the strength of economic sectors4. When factoring in all the stimulus created by reconstruction, rebuilding and reinforcing, there appears to be a trend of economic benefit following hurricanes and other natural disasters3.
Given the two-way potential of natural disasters, there are generally three directions in which an economy can move in the subsequent period3.
- Recovery to Trend : economy suffers an initial blow for a relatively short period, and then through stimulus, the economy recovers to its previous pattern of growth. This enforces the idea that hurricanes and other natural disasters only play a short-term role in the economic health and have negligible long-term effects.
- Build-Back-Better: notion, which suggests that while natural disasters cause initial setbacks and downswings, that positive stimulus candrive the economy to a growth path stronger than the pre-disaster trend.
- No Recovery: suggests that natural disasters are likely to result in permanent downturns in income level for heavily affected communities, often with no possibility for re-achieving pre-disaster growth paths. It is most closely associated with observed effects in low-income countries where recovery plans and procedures were less than optimal.
WHAT DOES THE FUTURE LOOK LIKE FOR HURRICANES AND THEIR EFFECTS ON THE ECONOMICS OF THE WORLD?
With factors like climate change to consider and other ever-changing realities of society, the future of natural disasters is unpredictable. While hurricanes may become stronger as global warming gets worse, it is also important to consider growing preparation efforts2. As the future progresses, the technology sector will continue to innovate and provide the latest products and services that could aid in the planning and resilience against natural disasters such as hurricanes. Better forecasting devices that provide up-to-the-second weather forecasts can mean the difference between millions of barrels of oil lost, and faster city evacuation and infrastructure preparation2. Governments can make the move to properly identify municipalities and regions at higher risk to economic downfall during natural disasters, such as Louisiana using historical data and aid in preparation and planning to dampen the effects of future events.
U.S. Government Accountability Office. (2020, September 10). Natural disasters: Economic effects of hurricanes Katrina, Sandy, Harvey, and Irma. Natural Disasters: Economic Effects of Hurricanes Katrina, Sandy, Harvey, and Irma | U.S. GAO. Retrieved September 17, 2021, from https://www.gao.gov/products/gao-20-633r.
DTN Team. (2021, February 1). How do hurricanes damage the economy? DTN. Retrieved September 17, 2021, from https://www.dtn.com/how-do-hurricanes-damage-the-economy/.
Kunze, S. (2021, March 10). Unraveling the effects of tropical cyclones on economic sectors worldwide: Direct and indirect impacts. Environmental and Resource Economics. Retrieved September 17, 2021, from https://link.springer.com/article/10.1007/s10640-021-00541-5.
Marohn, C. (2019, September 4). Hurricanes are great for the economy (but terrible for people and places). Strong Towns. Retrieved September 17, 2021, from https://www.strongtowns.org/journal/2019/9/2/hurricanes-are-great-for-the-economy-but-terrible-for-people-and-places.
Rosen, R. J. (2014, August 5). How much do hurricanes hurt the economy? The Atlantic. Retrieved September 17, 2021, from https://www.theatlantic.com/business/archive/2014/08/how-much-do-hurricanes-hurt-the-economy/375594/.
Stevens, P. (2021, September 8). Hurricane Ida’s DAMAGE tally could top $95 billion, making it 7th costliest hurricane since 2000. CNBC. Retrieved September 17, 2021, from https://www.cnbc.com/2021/09/08/hurricane-idas-damage-tally-could-top-95-billion-making-it-7th-costliest-hurricane-since-2000-.html.
Varghese, A., & Valle, S. (2021, September 8). U.S. oil losses from Hurricane Ida rank among worst in 16 years. Reuters. Retrieved September 17, 2021, from https://www.reuters.com/business/energy/oil-losses-hurricane-ida-rank-among-worst-16-years-2021-09-07/.
Sanicola, L. (2021, September 8). Oil settles up 1% on low U.S. output after hurricane. Reuters. Retrieved September 17, 2021, from https://www.reuters.com/business/energy/oil-climbs-amid-slow-supply-return-after-hurricane-ida-2021-09-08/.