Hurricane Harvey

As the repercussions of Hurricane Harvey continue to unfold, one thing is becoming clear: the damages of this disaster are not like what we've seen before. As has been true in other natural disasters, there are shortages of milk, food, clean water, and other basic necessities. Finding shelter from the flood waters is a pressing, life-threatening concern, and there are widespread issues with power.

But another potential crisis caused Hurricane Harvey is a shortage of a colorless, flammable gas called ethylene. This is because the hurricane tore through a piece of the Gulf Coast where ethylene is abundant. In fact, Texas produces almost 75 percent of the U.S.'s supply of ethylene.

So, with food and fresh water falling in short supply, why is it so important that there are fewer amounts of this chemical? Well, ethylene, while perhaps not entirely recognizable by name, goes into just about every major product that we use. Everything from cars, to plastic bottles, and even mattresses; a massive quantity of the items that we currently produce and use requires ethylene.

This is because the chemical can be processed into polyethylene, the most common plastic in the world. It can also become ethylene glycol, better known as antifreeze. It can even be manipulated into polyester for clothing, life-saving medical devices, PVC pipe, shoe soles, and so much more.

Clearly, a huge portion of modern manufacturing hinges on the availability of ethylene. This is bad news, considering Hurricane Harvey has forced the (hopefully, temporary) closure of 61 percent of Texas's ethylene-producing plants, according to PetroChemWire.

Ethylene. Image Credit: Benjah-bmm27 / Wikimedia

What's Next?

Kevin McCarthy, an equity analyst at Vertical Research Partners, told Bloomberg that, “The combination of Harvey’s path, duration and rainfall total is wreaking havoc with the supply side of the U.S. chemicals industry on an unprecedented scale...We certainly haven’t seen anything quite like it in our 18 years of following chemical stocks on Wall Street.”

Chirag Kothari, an analyst at consultant Nexant, told Bloomberg, “Ethylene really is the major petrochemical that impacts the entire industry." From transportation to goods and services and beyond, there doesn't seem to be a single sector that will not be affected by the dip in ethylene availability. For now, this will most likely mean increased prices, "...any little hiccup — and this is much beyond a hiccup — will dramatically tighten supply-demand balances,’’ Hassan Ahmed, an analyst at Alembic Global Advisors, said to Bloomberg on Thursday.

It is still unknown whether the plants that had to be closed were damaged in the hurricane. It could be that, within the coming weeks, it will be possible to quickly repair and open the plants, allowing them to operate again.

But even in this (who knows how likely) best-case scenario, there will be shortage issues. Some manufacturers are turning to international production in the meantime, but this loss is so great that it is difficult to predict the next steps, at least until the extent of the damage is known. In the meantime, it is fairly certain that prices will increase, as has already been seen globally with polyethylene.

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