Harvey could become one of the costliest US disasters
NEW YORK — The brutal storm pummeling the Houston area is likely to rank as one of the nation’s costliest natural disasters, with tens of billions in lost economic activity and property damage across a region crucial to the energy, chemical, and shipping industries.
Economists say the region is likely to recover quickly and continue its torrid pace of growth. But for now, at least, the storm is stunting the area’s upswing and redirecting Houston’s business focus from steady growth to damage assessment and rebuilding.
The Gulf Coast of Texas — including Houston and the surrounding areas — is one of the nation’s economic powerhouses, accounting for roughly $600 billion in economic activity, according to the Perryman Group, an economic analysis firm in Waco, Texas.
The area has a large and growing population and attracts continuous investment in oil-related manufacturing. It is also an important cog in global trade. Texas accounts for about half of petroleum and gas exports, along with about a fifth of chemical exports.
“Since the Port Arthur refining complex is the largest in the United States and the second largest in the world, this will no doubt impact gasoline and chemicals prices,” said Brett Ryan, senior United States economist at Deutsche Bank.
The storm caused at least eight refineries in Texas to shut down, raising concerns about potential increases in gasoline prices. The AAA said gasoline was selling for $2.37 a gallon on average across the country, 4 cents more than a week ago.
Whether prices rise further depends on how much damage refineries in the Texas Gulf Coast area sustain, said Jeanette Casselano, an AAA spokeswoman. “The situation is still pretty fluid,” she said. The affected refineries represent about 12 percent of the nation’s refining capacity, according to a report by Goldman Sachs.
Casselano said oil companies had ample stocks of oil and gasoline, which should limit the chances of immediate shortages. “Throughout the country we have high levels of supplies,” she said. “There’s a lot of gasoline in bulk storage in Houston, but right now you can’t get to it.”
It will take months for economists to measure the economic impact of the storm with any degree of accuracy.
But given Houston’s commercial importance — and its perch along a well-trod hurricane zone — economists and others have long taken it for granted that an epic storm would hit the region eventually, so have a head start on the numbers.
About two years ago, for instance, the Perryman Group’s chief executive, Ray Perryman, analyzed the hypothetical economic damage that would be wrought if storms of various sizes and magnitudes hit coastal Texas.
The estimates ranged from $11 billion to $80 billion — and the earliest estimates suggest this disaster will be on the upper end of that range.
Moody’s Analytics estimates that the damage will be $40 billion to $50 billion. The first and smaller set of losses — less than $10 billion — will come from things that don’t happen: homes not purchased, sales not closed, gas not bought or shipped. The second and larger set of losses, totaling tens of billions, will come from property damage.
“Things are too preliminary to know at this point, but I would expect Harvey to be one of the two most costly in history when all is said and done,” Perryman said.
The damage, while serious and expensive, is likely to be a fraction of the $130 billion in damage caused by Hurricane Katrina. Katrina was one of the worst disasters in American history, and the final toll, human and economic, was staggering.
When the levees broke, flooding was sudden and immediate and eventually killed close to 2,000 people.
The flooding from Harvey appears to be spread over a bigger area that had more time to mobilize, suggesting that the number of deaths will be far lower, Perryman said. Hurricane Katrina appeared to have had a greater impact on oil production and refining.
The Gulf Coast of Texas is more prosperous and populous than New Orleans. The Houston metropolitan area, the nation’s fifth largest, accounted for 2.9 percent of the nation’s gross domestic product as of 2015 — a figure that is almost certainly higher today.
“The Gulf Coast ports are critical to the US supply chain, and the refined petroleum and petrochemical production is critical to the US economy,” Perryman said.
And despite wobbly oil prices, local job growth has accelerated, along with continued improvement in home sales and construction. The number of Texas oil rigs has been rising over the past year, giving a big lift to exploration and chemical manufacturing jobs.
So far, however, the storm seems to have damaged things that can be replenished or replaced relatively quickly. Houston has huge amounts of capacity that appears to be largely undamaged and is unlikely to be offline much time.
Because most of the damage is arising from water rather than wind, resulting claims by homeowners are likely to fall most heavily on flood insurance, provided by the federal government.
The insurance is supposedly mandatory for homes in flood-prone areas, but in practice the requirement is hard to enforce, and people who buy policies can stop paying the premiums so the coverage lapses.
Last year, the Insurance Information Institute surveyed Harris County, which includes Houston, and found only 240,350 outstanding policies, compared with 1.6 million housing units. In the end, insurance claims for homes and small businesses will mostly be paid by the National Flood Insurance Program.
People affected by Hurricane Harvey who have no flood insurance must go through the process of applying for grants and low-cost loans from other agencies of the federal government, said Loretta Worters, a spokeswoman for the Institute. That means delays.
Insurance companies like State Farm, Allstate Insurance, Berkshire Hathaway, and Farmers Insurance continue to provide flood coverage for cars and other vehicles.
Once the storm’s immediate effect passes, there may be an economic dividend, through money spent on cleanup and rebuilding.
Moreover, factories and refineries are rarely running at full capacity, and as they come back online they can ramp up production to meet the backlogs that accrue. “Businesses have stockpiles and the ability to catch up,” said Christopher Thornberg, founding partner of Beacon Economics, a consulting firm.
As the floodwaters drain away and Texas shifts to clean-up mode, followed by a mammoth effort to replace what was lost, the daily modes of commerce will shift but not stop. Disruptions, displacement and property damage are quickly followed by federal aid and insurance checks.
“This is going to be disruptive but the Houston economy will overcome it very quickly, just like other regions,” said Mark Zandi, chief economist at Moody’s Analytics.
In fact, when natural disasters do show up in economic data it is usually as a small growth bump a few months after the storm, when rebuilding accelerates and insurance checks are cut.
One of the region’s biggest economic attributes is the fact that it is Houston. The growing economy and population is partly a result of the area’s relatively cheap housing, which has made it a huge draw for people fleeing higher housing costs in places like California.
Over the past six years the Houston metropolitan area has accounted for about 7 percent of new homes nationally.
The result could be a slight drag on the national construction market, but over time Houston’s immense drawing power is a big reason Issi Romem, chief economist at BuildZoom, a San Francisco company that helps homeowners find contractors, believes the region and its housing market will bounce back relatively quickly.
“It certainly won’t affect Houston the way Hurricane Katrina affected New Orleans because Houston has a much stronger economy than New Orleans ever did,” Romem said. “And compared to New Orleans, far more of Houston’s residents have been drawn to the city for economic reasons.”
One might think that the scale of the damage would give future home buyers some pause. In the aftermath of Hurricane Sandy in 2012, for instance, investors and homeowners had big questions about property values in coastal New York and New Jersey.
But according to analysis of home values by Zillow, the real estate database company, home buyers have short memories when it comes to storms. It seems that people like living by the ocean so much that they will keep building homes there even when it becomes clear that periodically storms will destroy them.