Hurricane Harvey

A massive tropical cyclone has been smashing its way through the state of Texas over the last couple of days causing incredible physical devastation along the way. It’s also hit financial markets in a number of ways. The biggest has been on the price of oil…

Oil, which basically powers the entire world, is where pretty much every kind of fuel begins its life. Petrol, diesel, kerosene and jet fuel all start off as oil, before being turned into different kinds of “fuels”. So cars, planes, buses, tractors, trucks and a whole host of other things rely on this base product oil, to work. But getting from oil to say petrol, is not a simple process. In particular it takes a lot of “refining” and some of the biggest “refiners” in the world are based in Texas. That’s great, except that  Hurricane Harvey has forced every one of them to close. And with the refiners being closed, it means their demand for oil has fallen to zero, which means they aren’t buying any.

Ok, boring interlude… Differences in demand have a massive effect on prices. It’s the reason why Adele tickets cost 200+ per person and Midnight Oils’ don’t (see here). The bigger the demand, the higher the price, the lower the demand, the lower the price. And that’s exactly what’s happened with oil. With so much demand being pulled from the system, with these massive oil refiners being forced to shut down, oil prices have fallen. And the longer these Texan oil refiners are out of service, the more the price of oil will fall.

But what does this mean for me, really?
If you happen to own any stocks of companies which produce oil (like Woodside Petroleum, BHP, BP, ExxonMobile, Shell etc.), you’ve probably lost a bit of money as the thing these companies sell, oil, has fallen in price. And if they are getting less money for what they are selling, they will be making smaller profits. Smaller profits are not good for a companies stock price.

But otherwise, in your general day to day life, the impact will be minimal. These “demand-disruptions” never really last for long. A big song and dance will occur of course, cause everyone needs something to write about, but at some point, the hurricane will pass, the refiners will reopen, the demand for oil will go back up and so too will oil prices. But at least you know why, for now, oil has fallen.

Fun fact
Hurricanes, Cyclones and Typhoons are all brothers from another mother. If the storm starts in the Atlantic ocean, we call it a Hurricane (like Hurricane Harvey), in the Pacific Ocean a Typhoon and in the Indian ocean a Cyclone. Collectively though, they are known as tropical cyclones. Fun fact indeed.

And that’s 5 Minutes. Hope it helps.

 

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Categories: General Finance, Investing, Macro Economics

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