Oil Prices: Where Are We?

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Understanding the effect of three consecutive hurricanes on oil price

Although Hurricanes Harvey, Irma and Maria have passed, the effect of their damage is still being felt. In particular, regular, midgrade and premium gasoline prices have increased in step in response to shocks on oil production in the US. Hurricane Harvey’s effect on the oil sector overshadows Hurricanes Irma and Maria, mainly because Harvey hit U.S’s leader of crude oil-refining by capacity, Texas. However, the U.S. has held large reserves of crude oil for natural disasters that might temporarily cut supply and surge demand.

Nevertheless, Hurricane Harvey’s effect on oil prices has reached consumers throughout the nation. During its peak in September, the average price of gasoline in the Midwest was 9.7% higher than the average price in August. On the east coast and west coast, there was a 14.9% and 4.6% surge in a price of a gallon of gasoline. Prices are slowly returning from their post-Harvey peaks, however, it will be a long time before prices return to pre-hurricane levels. One factor that might speed the process is an increased production of shale oil. Shale oil, which has slightly costlier extraction costs, is a possible substitute for conventional crude oil. When refined to remove impurities, shale oil can be used in similar ways to refined crude oil, such as diesel and kerosene. As the Energy Information Administration forecasts, shale production will grow by over 70,000 barrels/day, even though its growth has slowed the past months. The ability to substitute crude oil can alleviate growing demands amid a catastrophic natural disaster like Hurricane Harvey, and mitigate the surge in the price of gasoline. We have already seen the effect of shale substitution, as the price of gasoline has fallen in the last two weeks of September.

Looking forward, gasoline may increase in price due to greater efforts by OPEC to reduce production. This increase trickles down to the consumer, and is reflected in a higher cost per gallon. While gasoline prices have been dropping since mid-September, don’t expect it to be for long. As production cuts are being positioned for most of 2018, gasoline can hike back up to its glory days of 2011.

Aaron Choi is a student at New York University's Stern School of Business.

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