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How Could Hurricane Season Impact Energy Prices?

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As hurricane season approaches, we're looking back in history to see what major weather events can do to energy prices.

1) Weather Influences Supply and Demand

Weather plays a significant role in energy prices because of its impact on supply and demand. For example, in 2014, a staggering 22 percent of PJM Interconnection’s generation resources were knocked offline by the polar vortex, effectively cutting off supply and driving up prices. In 2015 and 2016, warmer-than-average temperatures led to a decrease in U.S. natural gas demand and contributed to historically low prices and record levels of natural gas in storage. As electricity is highly correlated to natural gas in many markets, power prices are similarly affected by significant weather changes. 

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2) Hurricanes Can Threaten Energy Infrastructure

As hurricanes are one of nature's most destructive forces, they can pose a direct threat to energy infrastructure in key production regions.  

In 2005, Hurricanes Katrina and Rita knocked out 113 drilling platforms and damaged nearly 500 pipelines - slowing production from 1.6 trillion cubic feet (Tcf) per month to 1.4 Tcf, and driving up natural gas prices from $6/mcf to $14.33/mcf in a single month.

3) Natural Gas Production has Changed

While hurricanes can still threaten critical offshore infrastructure, the natural gas landscape is significantly different now than it was a decade ago. In 2005, before Hurricanes Rita and Katrina, the U.S. was producing about 51 bcf/day, with offshore production making up almost 22 percent of total production.

Today, the U.S. produces around 74 bcf/day, but offshore production only accounts for roughly 5 percent of total production. The shale gas revolution has both boosted total US production and altered the location of production, effectively removing it from the path of violent hurricanes. 

In short, if a hurricane disrupts U.S. offshore production this season, it might have far less an impact on prices than hurricanes did in 2005. Even if it temporarily knocked out all offshore production, the overall effect would be short-lived and would most likely not be on the scale of the price fluctuations caused by Hurricane Rita. 

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Posted: June 01, 2018