Hurricane Joaquin

Hurricane Joaquin is moving up the Atlantic, and has strengthened to a Category 4 storm on Friday. To put things in perspective, Hurricane Sandy, despite the widespread destruction, was a Category 1 hurricane. Although experts predict that it will not directly hit the East Coast, many states have declared states of emergencies. South Carolina and Virginia have been hit the hardest – forecasters said that parts of these areas may experience more than 12 inches of rain by Monday.

For us in the city, heavy winds and rainfall would be the extent of the impact of Hurricane Joaquin. However, during Sandy, we saw power outages, road closures and massive amounts of infrastructure destroyed. In this post, I will explore some economic impacts of such disasters.

Hurricanes actually affect the economy too, through oil prices. Katrina devastated New Orleans in 2005, and shut down many oil and natural gas refineries along the Gulf of Mexico. Before the storm, at least 10% of crude oil and 50% of gasoline came from refineries along the coast. As a result, the price of crude oil went up by $6 per gallon.

How is Hurricane Joaquin expected to affect commodity prices? That very much depends on the path of destruction it takes as it makes its way out of the Bahamas today. Although Joaquin is not expected to directly impact the East Coast, hurricanes are often unpredictable. That being said, Joaquin is not expected to hit the Gulf of Mexico again. Instead, if it travels towards the East Coast, it could have as slightly different effect. It could hurt oil demand and refineries in the area.

With the warnings of a hurricane, people tend to want to stock up and stay indoors. This would limit travel, curbing demand for gasoline. On the supply side, if refineries are hit again, this would have a supply shock effect in the US. We could see an uplift in oil prices like we did during Katrina. To date, current crude oil prices have seen a slight uplift to around $45.54 per gallon. Historically, prices of commodities have usually skyrocketed with the impact of a natural disaster.

In Virginia, commodity traders have also expressed concerns about heavy rainfalls on cotton production. Crops there are about to be harvested, and we could see a similar effect in different commodity markets as well.

Ryan Lee