It’s been tough times in Texas, as the ERCOT market has suffered from sustained electricity outages amid bitterly cold weather. Many individuals went multiple days without running water or electricity. While the full human and economic cost will not be known for some time, the winter storm/electricity outages have led to dozens, probably hundreds, of excess deaths across Texas. Initial estimates suggest that the nearly weeklong involuntary shutdown has cost tens of billions of dollars. The last few weeks have been brutal.
We’re not going to discuss the outage’s causes at length: for that, we’d encourage you to read this shocking Bloomberg investigation (one of the most insane tidbits: ERCOT employees were forced to bring in portable toilets after ERCOT’s control center lost water). Instead of discussing the past, we’ll focus on the short and longer-term implications for oil, gas, and electricity markets.
How long will upstream and downstream outages last?
Let’s start with the short-term implications. Uri brought impassable roads and literally froze significant portions of the supply chain. Domestic oil and gas production will suffer for days or even weeks, while some estimates placed outages as high as 3 million barrels per day. We’ve heard that even production at some offshore rigs slowed down due to the freezing weather. Warmer temperatures have de-thawed rigs, pipelines, and plants, so production seems to be up and running. ERCOT has stabilized the grid (knock on wood), so upstream production issues will largely be resolved, enabling large industrial users (LNG, petchems, etc) to restart production, if they can.
Downstream issues are a much more serious concern. Dozens of ethylene crackers will face weeks (potentially months) of outages. Around 7.6 MMBPD of crude refining capacity was affected by the storm, and up to 5.4 MMBPD of USGC refining capacity was offline for the week ending February 26. It’s expensive to shut down and restart refineries, not to mention technically complex: some of the refineries will take weeks to return to pre-Uri conditions. Uri is hitting retail markets: about 1-in-7 gasoline stations in Texas were without fuel on Feb 24th. Of course, downstream operators that managed to remain open are now reaping the twin windfalls of higher prices and capacity utilization.
What are the risks from future polar vortexes?
Risk is a function of two elements: consequence and probability. In a Reuters explainer on polar vortexes, Northern Illinois University meteorology professor Victor Gensini said that parts of the United States have been 50 degrees (28 degrees Celsius) colder than usual. Dramatically colder temperatures can affect oil, gas, and electricity production while dramatically increasing demand.