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Thursday, 31 August 2017

Flood, Fuel Prices and Human Costs

The tragic flooding in Texas and Louisiana over the last few days has no precedent in the history of North America, and its consequences will only emerge in full over several years. The immediate effects are that thousands of homes will need to be replaced or majorly reconstructed, a massive proportion of the infrastructure will have to be reinstated and transport links repaired. Mercifully few deaths have been reported so far; and the life-saving capabilities shown by thousands of ordinary small-boat owners and their helpers have been both effective and heartwarming. Much of the damage is insured; probably more is not insured because damage on this scale had previously been inconceivable, so there is a huge cost to be met by the public purse and by private individuals.

The main industry in the area is oil refining, with a huge proportion of the United States' refining capacity being concentrated along the coast of the Gulf of Mexico: precisely where the hurricane [as it then still was] hit the coastline. It is forecast that global oil production is now so flexible that the loss of any oil wells to active exploitation in the coming weeks will have no significant impact on the availability or the price of oil, as such. However, the loss of massive refining capacity for [at least] a period of weeks will significantly affect the availability of petrol ['gas'] to American drivers and of refined fuel for domestic and industrial purposes. There may, therefore, be a period of raised prices for refined oil products, partly because the net supply is cut, but more because to deliver fuel from places other than the Gulf coast requires longer supply-lines, the use of different pipelines and more vehicles to move the products to their consumers, and thus the costs of actually making the petrol and heating oil available will rise significantly until the gulf refineries can begin operation again.

One of the problems that the refinery companies are already tackling is the fact that thousands of staff have had to move from their homes; and a large proportion of them will not be able to reoccupy their homes for many months. Thus, though the operation of the refineries may not suffer much as a result of inundation in the flood [because many measures of damage mitigation could be taken after storm warnings had been issued], the need to rehouse so much of the labour for many months had not been taken into account in the contingent planning of the refining companies. The unforeseen costs of these measures to secure attendance by the workforce - over several months, at least - will add to the increase in the price of petrol and other refined products, and will extend the period over which the price increase will endure. This may be sufficiently significant to add a fraction of a percentage point to US inflation.

So, while the human and social costs are rightly the primary concern at the moment - and for some time to come - the economic consequences of the flooding [and the relative small amount of wind damage that has occurred] will be long-lasting and significant. They will also require the entire risk-management approach of the community and of its major employers to be recast. Nature is constantly stressing her power to disrupt humanity's activities, and to show that our risk management was not sufficient. This is the first lesson of the Texas tragedy of the past few days.

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