A potential 'black swan' for US oil prices is being overlooked: unreliable electricity grids
Failing US power grids could be the next vulnerability in the supply chain for oil, energy trader Brynne Kelly says.
Most of western and central US is at high risk of electricity shortfalls or disruption this summer, research has found.
Problems with power grids are a potential catalyst for chaos in energy markets that are underappreciated, Kelly says.
Electricity grid problems in the US are a potential "black swan" that could wreak havoc in energy markets, according to Cornerstone Futures research director Brynne Kelly.
In an analyst note, the energy trader argues that failing power grids and electricity shortages could be the next vulnerability in the supply chain for oil and its products, such as gasoline.
Those under-the-surface risks are being overlooked, and that makes them a possible "black swan" — an unpredicted event with a severe impact. While crude oil isn't much used to generate electricity, power itself is needed to make oil, Kelly noted.
"Said another way, a failing power grid COULD BE the next oil chain supply problem," she said.
"Problems with power grids across the US and other countries are a potential catalyst for chaos in energy markets that are underappreciated."
The reliability of the US electricity grid is being taken for granted, Kelly said. But it's under pressure as the industry goes through a mandated shift from fossil fuels to clean energy sources, and with the peak summer demand ahead.
She pointed to the impact of a rare 2021 winter storm in Uri, Texas, to show how disruption in electricity supply can spread to other sectors. Failures in the state's ERCOT power grid proved catastrophic for operations there, as the domino effect hit energy producers, as transportation, water and telecoms.
Texas is one of the largest oil-producing states in the US, accounting for 42.7% of crude oil production, according to the US Energy Information Administration.
"A power grid failure on any scale larger than a local one like we saw in Texas, would be, and could be potentially catastrophic," Kelly said.
"If the fallout from Uri in Texas ... were any indication, natural gas and oil pricing could be affected by power failures due to heat, storms or some other unplanned event," she added.
"We are not predicting or sounding alarms, but the risk is poorly quantified. It won't matter until it matters, unfortunately."
Concerns are mounting about US power grids ability to cope with peak summer demand, as the clean energy shift moves forward without necessarily having the technology in place to keep them resilient.
In a recent assessment of the US electricity grid's reliability, the North American Electric Reliability Corp. warned about capacity shortfalls and high risk of energy emergencies due to heatwaves, droughts and wildfires, among other factors.
"Russian attackers may be planning or attempting malicious cyber activity to gain access and disrupt the electric grid in North America in retaliation for support to Ukraine," the report's authors said.
Electrical grids in the west and most of central US, including Texas, have an high risk of insufficient operating reserves, the NERC found.
But in a recent note, S&P Global noted an above-normal Atlantic hurricane season is predicted for the US this year, which could dampen power demand in Texas. When storms hit in 2021, daily power burn in the region dropped 25%, it noted.
The most important thing, according to Kelly, is that the markets for oil, gasoline and natural gas are already squeezed on the supply side, given the Ukraine war and sanctions. A break in the reliability of electricity is a potential risk that should be acknowledged.
"So far there have not been problems at the last stop on the chain, power generation and transmission. Regardless, the supply chain is vulnerable," Kelly said.
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