The New Economics of Hurricane Impacts to the Energy Market

Logan Callen

Atlantic hurricanes have always been a hot topic when discussing energy pricing during the summer months, with official hurricane season running from June 1st through November 30th. Historically, Atlantic hurricanes have caused some major shut-ins of natural gas and oil production in the Gulf of Mexico (GOM). For example, in 2008 Hurricanes Gustav and Ike caused 5.5 billion cubic feet per day (Bcf/d) of natural gas, and 1.1 million barrels per day (bbl/d) of crude oil production to be shut-in from the damages that occurred according to the Energy Information Administration (EIA). However, EIA now reports that “in 1997, 26 percent of the nation’s natural gas was produced in the federal Gulf of Mexico; in 2012 that number was 6 percent. The GOM share of crude oil production also has declined, from 26 percent in 2007-11 to 19 percent last year.” This shift in regional production has caused a change to the impacts we see from hurricanes as well.

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With more natural gas production in regions like the Marcellus Formation in Pennsylvania, the immediate supply impacts to market pricing are greatly reduced. However, the combination of aging infrastructure and recent storm tracks that rake up the Eastern Coastline have led to greater impacts in regards to longer-term energy infrastructure costs. After Hurricane Sandy’s devastating effects to the East Coast in late 2012, many utilities have initiated a variety of storm hardening and resiliency projects to enhance infrastructure to resist and recover quickly from extreme weather events. These upgrades come at a cost, and a variety of utilities are increasing their storm hardening budgets.  As an example, Con Edison in New York has slated over $1 billion dollars to harden their system over the next year, with nearly a third of the costs proposed to be passed down directly to rate payers, whether on third-party supply, or on default utility supply.

Prior to the shale explosion in the United States, the supply losses from these storms in the Gulf of Mexico were so great that the supply concerns were the primary focus. Now the focus is less on supply disruptions and more on the demand reductions created. Hurricanes affecting the East Coast typically create lower energy usage due to loss of power when infrastructure is damaged, as well as from the impacts of less people utilizing their air conditioners since the weather is typically cooler and wetter than the normal summer temperatures. Even though the focus of hurricane impacts to the energy market has shifted over the past few years, from supply disruptions to infrastructure damage and demand reduction, it still remains an important item of discussion. Every year a variety of weather forecasting services release a forecast for the Atlantic hurricane season. Forecasting skill varies with both the different agencies putting out their forecasts and the date the forecasts are released. Earlier forecasts are obviously lower quality in terms of accuracy since weather is so dynamic; anything outside of a two week window becomes more about climatology trends and long-range models. The National Oceanic and Atmospheric Administration (NOAA) puts out its forecasts in June and August. The forecast accuracy can range between different agencies depending on their models and the date the forecast is released. Early April releases are typically very poor predictors, with accuracy increasing for June and August forecasts. Since there can be so much variability, it is helpful to get a sampling of a variety of forecasts to see if there is consensus in the different models.

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NOAA’s 70 percent confidence forecast for this year calls for between 6-11 named storms, with 3-6 of those likely to become hurricane strength, and of those hurricanes, 0-2 are expected to become major hurricanes. The current forecast consensus is showing expectations for around 8 named tropical storms, 4 hurricanes, and 1 major hurricane. When compared to the historic averages of 12 tropical storms, 6 hurricanes, and 3 major hurricanes, these forecasts represent a below-average hurricane season for the Atlantic. The primary reason for this below-average forecast is strongly tied to the expectations that the weak El Niño event we are currently experiencing will persist or intensify during hurricane season. El Niño conditions are considered to be in play when Sea Surface Temperatures [SSTs] are above +0.5 degrees Celsius from average in a specific region of the Pacific Ocean. El Niño hampers hurricane formation by introducing wind shear to the upper parts of the storm systems, as well as increasing high pressure and air stability over the tropical Atlantic, so these forecasts help create an expectation of a lower storm count this year.

Although the impacts to the energy market from hurricanes have shifted from short-term supply issues to longer-term infrastructure cost increases, hurricanes remain a hot topic during the summer months. Even with a below-average forecast, it only takes a single landfall hurricane, like Hurricane Sandy in 2012, to cause devastating damage. If you live or have businesses in active hurricane regions, be sure to be prepared, and if you need information about outages or easy access to utility contact information, be sure to check out Ecova’s Storm Resource Center as well.

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The information in this page is offered only for general informational and educational purposes. It is not offered as and does not constitute legal advice.

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