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Energy crisis in Texas could lead to years of impact on economy and policy | Commerce Street

We learned how unprepared our state was for days of record low temperatures and the toll they took on our power grid. The costs are now tallying up.

SAN ANTONIO — The weather may be warming up, but the winter storm in Texas just weeks ago won't be easily forgotten, especially by Texans who suffered through the cold weather without power, paid up to fix damage and replace spoiled food in just days. We learned how unprepared our state was for days of record low temperatures and the toll they took on our power grid. The costs are tallying up and could be passed on in some ways to taxpayers.

In this episode of Commerce Street, a business podcast from KENS 5, we're taking a look at the overall economic impact of the winter storm power crisis. KENS 5 spoke with Dr. Taylor Collins, an assistant professor of economics at the University of the Incarnate Word, and Dr. Thomas Tunstall, the senior research director for the UTSA Institute for Economic Development

To listen to the full episode, head to Apple Podcasts, Google Podcasts or listen below:

KENS 5:  Looking at the power industry itself, just that particular industry, obviously it could be hugely impacted from a perspective of attention and policy. But economically, what impact are we going to see on the power industry for years to come? 

COLLINS: Tough to say, because a lot of the impact we're going to see is going to be a result of what regulatory changes come out of this. If there's no policy change, the impacts we see might honestly be relatively small.  

Maybe we see firms being a little bit more risk averse. Maybe we see a little bit more storage facilities popping up in order to prepare for stuff like this. But honestly, if that sort of stuff isn't mandated, there's a there's a very strong economic incentive for energy producers to keep doing what they're doing now. 

And so just to give you an example on that, we hear a lot of talk about winterizing equipment for these energy firms. Right. You might hear the response that, well, now that we've seen that this worst form is possible, firms are going to have an incentive to winterize themselves. They don't need to be regulated into doing this. The problem with that sort of argument is that winterizing a single well is going to cost a hundred thousand dollars and we have two hundred fifty thousand wells in Texas. 

So to think that we're just going to choose to embrace it...we're not talking about a small sum of numbers a year in terms of getting this infrastructure prepared for the next big storm. And if the next big storm is only a one percent chance happening each year, I mean, firms tend to think on five, six, seven year timelines, five percent chance we see something like this again in the next five, six, seven years... it's probably not in the firm's best interest to go ahead and make these investments on their own. So if we want to be prepared for the next storm, it's going to probably take some sort of regulatory oversight. 

If that does come, it likely has a cost all the way filtering down to consumers because again, a hundred thousand dollars per well. We're talking about a lot of wells that's going to add a cost level for producers and some of that's going to spill over to consumers. And that's the trade off we're thinking about is, low probability of a catastrophic outcome versus a certainty of higher utility bills each month. Which of those do we want to go with? I think we saw very clearly in this spell just how costly that big negative outcome was. Because of that, we're certainly going to see more calls for regulation; I don't know how far those are actually going to go in an anti-regulatory state. In many cases it's for good reason but this is a case where some additional oversight could really serve well.

KENS 5: When you talk about regulation and deregulation in Texas, just from a historical perspective and in context of what you've seen here over the years, obviously, there's been a general resistance a lot of the time to adding too much regulation. Does this seem like the kind of event that really is once in a decade situation that could shift the viewpoint on this? Or I mean, not necessarily asking me for a political opinion, but just historically, has there been anything else that has really made lawmakers more conducive to strengthen regulation? 

TUNSTALL: Well, certainly the severity of this storm, the fact that a lot of the state was without power for up to, in greater or lesser degrees, for a week. I mean, it's one thing if the power goes out for a few hours at night or even part of a day, but the length of time that many Texans were without power... I think is going to cause- you mentioned supply chains. I think a lot of that is already in need of rethinking. 

We've seen the impact we saw with Hurricane Harvey, the impact on supply chains, a different impact for COVID-19, but still affecting supply chains in terms of the things that were in short supply and now with the supply chains associated with the electricity. And some of that may have to do with deregulation in that private companies are-- they're driven typically by quarterly earnings calls and they're trying to lower costs and minimize inventories and have everything arrive just in time, as opposed to having buffer stocks and backup systems and things like that. And so it goes... if it is determined that some of those forces of competition that go along with deregulation actually made this outage more likely. [we could see action]. And you've already heard Rick Perry, Governor Abbott, to lots of folks who are typically very, very in favor of deregulation, starting to ask that question. Is this perhaps is this industry important enough to consider a little more oversight than it currently has?

KENS 5: Is it fair to compare a crisis like this to something like a hurricane?

COLLINS: We saw a very large scale in a short amount of time. Whenever you're talking about something like cold enough weather to actually shut down businesses by freezing the electricity outages, things like that, you definitely get some parallels to hurricanes where, you know, you've got flood damage, you've got people who just can't get out to their place of business any time you've got that sort of framework. 

I mean, you've got the standard hits to retail standards, to restaurant tourism, anything like that. That has a really human impact. And we saw that from the week of the storm, without question, as even grocery stores were having to shut down simply because they lost power. So for this coming off the back end of the pandemic, obviously, where restaurants are pretty desperate to get back open and get people in their stores, it can make an impact. For a lot of these restaurants, it's going to end up being one week worth of costs. And that may not sound like a big deal. But again, one week when you're coming off of a year where you've been at 20 percent capacity, it could be the difference for a couple of folks needing to shut down versus staying open.

TUNSTALL: The impact of Hurricane Harvey was estimated to be somewhere in the vicinity of one hundred and twenty five dollars billion in and it's possible that winter storm duty will approach that level. One important distinction to make is that typically hurricanes Hurricane Harvey, even if it was relatively localized, I mean, along the coast, for example, it did take on a pretty large section of the coast, but the winter storm affected virtually the entire state. So that's a huge difference in and of itself. 

KENS 5: Hurricane Harvey is the big one that people keep mentioning. But just from a historical perspective here in Texas, how often is it that we have some kind of disaster driven impact on the economy like this? And I know that you mentioned the state homeowners were a good example to what our other big events that caused this kind of shock to the system. 

TUNSTALL: It could be any number of things. It could be the natural disasters, which can take a variety of forms as we've seen. It could also be manmade. I mean, theoretically, we could see some terrorist-related type of activity as well. So they can come in any number of forms. 

The hard part is you never know what the next one is going to be or quite what it will look like. I don't think anybody would have predicted the COVID-19 impact. And even when we did see it, most of us that went into the work at home or stay at home mode thought it would be for a couple of weeks not... over a year and then the winter storm, I mean, nobody really saw that coming. The severity. I mean, I guess several days out, a week out, we knew about the severity of it...but this storm is going to prompt us to rethink a lot of things, whether it's the reliability and resilience of the grid, whether we should have a separate grid for Texas, and is deregulation- are there risks associated with that in terms of resilience and reliability?

KENS 5: For which industries will we most likely see long-term impact?

COLLINS: Agriculture has been impacted- onions, cabbage, there will be issues wihth crops for at least the next year. In terms of manufacturing, I think the industry that's getting hit the hardest right now would be semiconductors and anyone who uses it. So idea being, if you're talking about producing a steel pipe, right, there can be variation from one steel pipe to the next. One of them has a little scratch, one has a smudge. And if you have to shut down a steel plant and bring it back online, you can do that pretty quick.

We're talking about semiconductors. You need a very highly clean, specialized standard manufacturing plant in order to produce these very fine. technical pieces of equipment. And so we're seeing a lot of plants in Austin in particular-  all of them had to shut down because of power demand issues. And because of that, I mean, it takes them weeks at a time to get back on-line, to get everything cleaned out and get it ready to produce those goods. And so the semiconductors themselves are an issue, and then anything that will use them will be an issue as well. So things like automobiles, things like laptops and things like consumer electronics.

There's already a global semiconductor shortage coming out of the pandemic that's been going on for a long time. So adding on top of this, the shutdown we're seeing in these Austin plants, I think that's one area where manufacturing is going to struggle, particularly after having such a rough go of that recently. But again, I do think in general, most manufacturing is in good shape, I think. When we talk about this storm in particular, we need to distinguish micro-level impacts versus macro-level impacts, the macro is the big picture, aggregating everything together. And at that level, I think things are looking pretty good overall. Honestly, the bounce-back is pretty strong when we're aggregating all the numbers together. I think we're seeing positive movement.

The Dallas Fed has a mobility index they put out every day and those numbers were higher than before the storm so I think we have significant reason to be optimistic about economic activity coming back on-line; at the micro level though, there are some disruptions.

KENS 5: Even the president on a national level has been talking recently about what measures could be taken to address issues and supply chain disruption, because we've seen a few of these problems, as you mentioned, over the past couple of years. When you talk about doing that, is it mostly just about diversifying geographically where resources come from or are there other pieces to that?  

TUNSTALL: That's one aspect of it- diversifying geographically, another is buffer stocks. An interesting example is ventilators which were in short supply. Private industry has very little incentive to keep large numbers of those on hand if they're going to be sitting idle; they're very expensive to just keep keep in your inventory if you're not going to use them. And so that's probably suggests a role for government at some level. 

But in addition, as I mentioned, the supply chains in general have become much more tenuous. They're really so fine-tuned that that any disruption can can cause some some heartburn, as we've seen. And I think that supply chain theory, which has traditionally focused almost exclusively on cost and efficiency, will now be looking at sort of a broader picture of reliability and resilience. So there are actually several things that can be done and I think will be done as the issue gets further analyzed.  

KENS 5: When you talk about that fine-tuning, just anecdotally, I heard from one manufacturer that makes joint compounds and products like that, that because of the petrochemical plants, they had only been getting like week of type shipments because it's cheaper for the companies. Right. I mean, there there's an economic reason behind that. Is that pretty commonplace? 

TUNSTALL: Yeah. I mean, there are elements. There's more to it than that. But that that is key. Holding inventory ties up capital. It risks becoming obsolete and risks damage. So manufacturing techniques and a lot of supply chain basics right now don't want a piece of inventory in to arrive until almost literally the nanosecond before it's needed. And it works fine as long as everything's as long as the logistics are in order, that the transportation networks are flowing. But if those get disrupted, then suddenly that sort of super fine tuning basically brings things to a virtual halt.

Is there anything else that you think is really important for people to know or to understand about this situation?

COLLINS: Something we want to watch out for in the back into this, especially Texas being a large energy producer and in particular large energy exporter to Mexico. I think it's worth paying attention to the political discussions around Mexico's energy independence. That's been a talking point for President Obrador for a long time. And he's already been using the storm to kind of re-emphasize that particular message that Mexico needs to increase their own natural gas production. Mexico is getting some 60 percent or so of their electricity from natural gas. They're importing most of that natural gas from Texas. They lost one quarter of their imports during the storm; couple of million households in Mexico, went offline because of the Texas production issues. For a long time, the Mexico side of the Eagle Ford Shale has been a little underdeveloped compared to the Texas side. Obrador has been pushing for Mexican energy independence and increasing that production. I wouldn't be surprised if he uses this event to re-emphasize the need to do that. 

That can be a mixed bag when we talk about energy. US is importing a lot of raw energy products from Mexico and then exporting a lot more refined products. So maybe if they're increasing their natural gas production, that allows us to increase our refining capabilities. There's a possible upside to it. But it's also a potential big customer loss if Mexico starts fully self supplying their own natural gas with this industry, potentially something that would just add to the long term consequences to the energy side of things.

TUNSTALL: Well, this is a real challenge for public policy going forward, I think that these these sort of black swan events that are happening with a sort of disconcerting regularity, I think need to be factored in more so than than than perhaps we have. We're going to get another hurricane. And that's the that's the thing you can say for certain. What you really can't say for certain is what's going to be the next COVID or the next ice storm... Just unfortunately, a lot of possibilities.

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