Climate Change and Energy Investing: More Harveys to Come

David Fessler By David Fessler, Energy and Infrastructure Strategist, The Oxford Club

Market Trends

This week, all eyes were on Hurricane Harvey and the catastrophic flooding it brought to southeastern Texas. Our hearts and minds are with everyone who has been affected.

But the devastation will extend far beyond the tragic casualties and property losses…

As energy and resource investors, we need to consider the potential impact that Harvey and other future storms could have on our portfolios.

U.S. gasoline prices are hitting two-year highs. By Wednesday, the hurricane-turned-tropical-storm had shuttered more than 20% of all U.S. refining capacity.

As of Wednesday, relentless rains continued to hammer the Lone Star State and Louisiana. Due to flooded roads and highways, employees can’t even get to many refineries.

On Wednesday, Saudi Aramco shut down Motiva, the nation’s largest refinery. Exxon Mobil (NYSE: XOM) also shut down Baytown, the second-largest oil refinery. Between the two, they process 1.2 million barrels per day of crude oil.

Crude oil, on the other hand, is in plentiful supply.

With refineries unable to process crude, prices will soon tank. Harvey, meanwhile, is making its third landfall on the battered Gulf Coast…

Are We Making Things Worse?

According to two 19th century physicists, we are.

Rudolf Julius Emanuel Clausius and Benoît Paul Émile Clapeyron were the founders of modern thermodynamics.

They developed the Clausius-Clapeyron relation, which allows us to calculate how much water the atmosphere holds under any atmospheric condition.

Here’s the bad news: The atmospheric water-holding capacity increases by 7% for every 1 degree Celsius rise in temperature.

Over the past few decades, average surface temperatures in the Gulf region have risen by 0.5 degrees Celsius (nearly 1 degree Fahrenheit). That means the atmosphere can hold 3.5% more moisture.

But right before Harvey came through, Gulf temperatures were 0.5 to 1.0 degree Celsius warmer than current averages. That makes them 1.0 to 1.5 degrees Celsius warmer than those 20 years ago.

That equates to 3% to 5% additional moisture in the atmosphere. This increases the likelihood of more rainfall and, in turn, more flooding.

In addition, the layer of warmer water in the Gulf was much deeper than normal this summer. This gave Harvey plenty of water to feed on as it grew in intensity before slamming into the Gulf Coast.

All of these factors combined to intensify Harvey’s power. Stronger winds created more damage and a much higher storm surge.

To make matters worse, two counter-rotating air masses kept Harvey in place over Texas. For five days, it just sat there.

That allowed the storm to suck up moisture-laden air from the Gulf. It carried it inland… and dumped it.

As I write this, it just keeps dumping. Both Texas and now Louisiana are still getting soaked…

Houston has already received more than 51 inches of rain. That’s more rain than it normally gets in an entire year.

By the time it’s over, Harvey will have dropped roughly 1 million gallons of water for every person in southeastern Texas.

Unfortunately, we could see more storms like this due to global warming.

Most scientists quickly point out that climate change isn’t responsible for Harvey itself. But they also acknowledge that global warming made it worse.

According to Michael Oppenheimer, a Princeton University climate scientist, “This is the kind of thing we are going to get more of. This storm should serve as warning.”

Kerry Emanuel, a meteorology professor at Massachusetts Institute of Technology, said a downpour like Harvey would normally occur only once every 1,800 years. But according to his research, this kind of rainfall could now occur once every 300 years.

Like Oppenheimer, Emanuel believes that warmer air from the Gulf of Mexico is holding more water. He also said that steering currents have changed since 2010.

Wild weather events around the globe are becoming more frequent. It’s also becoming painfully clear that man has had an adverse effect on the intensity and duration of those events…

In the case of Harvey, a major portion of U.S. refining capacity is now offline. No one knows for how long.

On Thursday, the operator of the Colonial Pipeline shut down the line due to flooding in Texas. The Colonial Pipeline provides almost 40% of the gasoline for Southern and Eastern states. In the near term, this will continue to decrease the supply of gasoline – pushing prices up.

Longer term, I expect both crude and gasoline to revert to pre-Harvey levels. U.S. crude production continues to increase, and most refinery capacity should be back online in a month or two at most.

Unfortunately, we will probably have more Harveys in our future. They could wreak more havoc on our energy supply.

We’ll be here to help you plan and adapt your energy and resource portfolio in the face of all of Mother Nature’s surprises…

But please keep the folks in Texas and Louisiana in your thoughts. They’re certainly on our minds here at Energy & Resources Digest.

Good investing,

Dave