Storm Surge: Economic Fallout of Hurricane Milton

Quick Reading:

• Hurricanes that have struck the US over the past two decades have caused over $1 trillion in damages.

• Although the total number of hurricanes from 2003 to 2023 has not significantly increased, their intensity has shown a notable upward trend.

• Hurricane Milton is expected to cause $10 billion in losses to the oil sector due to refinery shutdowns and production disruptions.

• Federal spending increases and supply chain disruptions could add further inflationary pressure.

Another Hurricane on the Horizon

The United States is bracing for the impact of Hurricane Milton, expected to hit Florida with wind speeds of up to 100 miles per hour. According to the National Hurricane Center, this is a particularly dangerous storm, projected to escalate to Category 3 by the time it makes landfall.

This comes just weeks after Hurricane Helen, a Category 4 storm, ravaged the southeastern US on September 26 with winds reaching 140 miles per hour. Helen tore through six states, leaving 230 people dead and causing an estimated $260 billion in damages. It joins a growing list of annual storms that continue to inflict severe economic damage on the US.

This report examines the potential economic impacts of Hurricane Milton, focusing on its effects across different sectors, inflation, and growth, as the Federal Reserve seeks to control inflation.

Significant Financial Losses

Over the past two decades, the US has experienced approximately 40 major hurricanes, averaging one to two hurricanes making landfall each year. Some years saw multiple severe storms, such as 2005 with Hurricanes Wilma (185 mph) and Katrina (175 mph), and 2017 with Hurricanes Harvey (130 mph), Irma (185 mph), and Maria (175 mph). These storms collectively caused massive losses in both lives and property, often reaching hundreds of billions of dollars.

Hurricane Katrina in 2005 alone resulted in approximately $160 billion in damages, while Harvey in 2017 led to $125 billion in losses. In total, the financial toll from hurricanes over the past two decades has exceeded $1 trillion.

Data from 2003-2023 shows no consistent increase in the number of hurricanes, but the severity of these storms has clearly intensified. This increase in intensity is attributed to climate change, which has fueled more powerful storms, causing heavier rainfall and widespread flooding. Coastal areas, in particular, are now facing higher risks, necessitating new strategies for risk management and adaptation to increasingly violent storms.

Clear Impact on the Oil Industry

Hurricanes hitting the United States over the past two decades have caused significant disruptions in oil production in the Gulf of Mexico, cutting off millions of barrels per day. Hurricane Milton has already led to the shutdown of several refineries and the closure of numerous gas stations, severely limiting fuel supplies.

Kinder Morgan, a major energy infrastructure company, has announced the closure of its refined product stations and the suspension of two key pipelines that transport diesel and jet fuel from Tampa to Orlando in central Florida. With large-scale evacuations underway, fuel prices could remain elevated even after the hurricane has passed, particularly as many roads are flooded or impassable, and power outages further complicate the delivery of fuel to those in need.

The damage extends beyond refineries and fuel stations. Offshore drilling rigs and oil pipelines are also at risk, with companies like Chevron announcing the closure of its Blind Faith platform in the Gulf of Mexico. Meanwhile, ports in Tampa, Jacksonville, and Fernandina have been shut down, halting maritime traffic.

While the Biden administration is working to minimize losses, Hurricane Milton is likely to disrupt supply chains, delay the delivery of crude oil and refined products, and drive up energy costs due to higher volatility in oil prices. Markets are expected to react sharply to these supply interruptions, reflecting ongoing fears and uncertainty.

Initial estimates suggest that Hurricane Milton may cause up to $10 billion in losses for the oil sector, primarily due to refinery closures and halted production.

Broader Economic Consequences

Hurricane Milton is likely to exacerbate financial pressures as businesses close, residents evacuate, and many workers lose income. With the US budget deficit already at $1.9 trillion, the federal spending required to address the damage from Milton and its predecessor, Hurricane Helen, will widen this fiscal gap, affecting overall economic output for the year.

Job losses and increased unemployment claims, coupled with higher federal spending, are expected to drive up public debt and complicate the Federal Reserve’s efforts to rein in inflation. The initial disruption to supply chains, especially in energy markets, will likely lead to higher prices for goods, increased demand for gasoline, and mounting inflationary pressures.

Additionally, a surge in insurance claims due to property damage could push some smaller insurers into bankruptcy, further straining the financial system.

Opportunities Amid the Challenges

Despite the significant risks posed by these hurricanes, certain opportunities may emerge. For example, there is likely to be an increased focus on resilient infrastructure investment, including developing flood defenses and improving drainage systems. Innovative architectural designs could also bolster the real estate sector by making buildings more resistant to hurricanes.

There is a clear need to invest in advanced forecasting technology and early warning systems, which could foster research and innovation in disaster response technologies.

With climate change continuing to drive severe weather patterns, attention is also likely to shift toward green energy solutions, accelerating the transition to renewable energy sources. Rebuilding efforts following these storms could focus on sustainable energy systems, pushing the country toward a greener future.

As the insurance sector is particularly exposed to the effects of these hurricanes, we can expect insurers to introduce new products and better risk management strategies to mitigate future losses.

By focusing on both short-term recovery and long-term resilience, the US may be able to transform these natural disasters into opportunities for economic innovation and structural improvement.