First as a hurricane and then a tropical storm, Harvey is sure to affect more than the local Gulf Coast economy. With a path near almost one-third of U.S. refining capacity and one-fifth of its crude production, the storm already has shut down a hefty proportion of the industry.
Where are we going? To why hurricanes do not help an economy.
Step 1: A Supply Summary
First we should look at the supply chain that Harvey is hitting. Below, you can see the location of the Gulf’s refineries and where they send oil along the U.S. East Coast:
Step 2: Shipping
When Hurricane Harvey approached the Texas coast on Friday, immediately, some links in the gasoline shipping supply chain were eliminated.
You can see the dive to zero for departing vessels and maybe 1 for arrivals in Corpus Christi, Texas:
Step 3: Markets
Meanwhile, before the storm’s landfall, markets also had something to say. Because less gasoline could mean higher prices, we just needed to look at futures markets to see the weather prediction.
On the New York Mercantile Exchange (NYMEX), last Friday’s ups and downs of futures for a gallon of unleaded gasoline corresponded to changes in the storm’s intensity. At first futures moved upward. But then they reversed when the weather prediction changed:
Now, with the storm’s impact spreading, we can ask about the aftermath.
Our Bottom Line: The Broken Window Fallacy
Nineteenth century economist Frederic Bastiat (1801-1850) said “destruction is not profitable” because disaster recovery replaces what was lost. So, although a clean-up could make the GDP surge, the spike reflects an increase in spending, not national wealth.
Bastiat questions the assumption that a broken window can be an economic blessing. He agrees that a glazier would receive, for example, six francs to fix it. However, he then says, “…if…you conclude…that it is good to break windows, that it helps to circulate money…I am obliged to cry out: That will never do! Your theory stops at what is seen. It does not take account of what is not seen.”
Bastiat wants us to recognize that the money given to the glazier would otherwise have been spent on new shoes or a book. Having been able to spend the six francs on a new pair of shoes, their owner would have had new shoes and the old, unbroken window.
So, whether looking at Corpus Christi’s port activity, gasoline futures, or the GDP, we can see the downside of hurricane economics.
My sources and more: Always excellent for unexpected detail, Vox had the economic perspective for Harvey. But if you want a firsthand look, do go to Corpus Christi port information. In addition, EIA is a solid source as is this Marketwatch analysis of gasoline prices. Finally, econlib is always handy for bios and economic background information.
Please note that my description of the Broken Window Fallacy was published in a previous econlife post.