Ed Wallace

Harvey: the cost is only beginning

Ed Wallace
Ed Wallace

We called it Lake Beechnut as we watched it rise in 1974. Standing on the showroom floor of Sam White Oldsmobile, just a block off of Highway 59 in Houston, we watched as two thunderstorms in the same week inevitably created this miniature water wonderland. Our four-lane divided Beechnut Street would flood, forcing us to move our new cars from the dealership’s front lot to higher ground in the back.

One time some kids got out their canoe and took advantage of their temporary water reservoir; a man pulled his motor boat out of his garage and went for a spin. A good guess is that for two long blocks the water might have gone 8 – 12 feet deep, but by the next morning it was always gone. Houston’s news reporters regularly bemoaned Buffalo Bayou’s drainage problems.

Of course, that can’t compare to the damage a slow-moving hurricane’s constant rain inflicted on the city that’s responsible for 3.5 percent of the nation’s Gross Domestic Product, controlling 2.4 percent of our employment, in an area larger than the state of New Jersey. And unlike 40 years ago, today a sizable representation of Dallas Fort Worth’s most respected car dealers now own stores in the greater Houston metro area.

I spoke with an old friend, Kevin Krott, who runs fixed operations at Carl Sewell’s stores just south of the Woodlands; Kevin said those dealerships mostly escaped damage. The concern was that the Brazos River would go over its levees later in the week and cause damage to properties in Sugarland.

Tom Tyrell is John Eagle’s partner at Clear Lake Honda near NASA 1, and his store too was spared any major damage, a situation he reported was much the same at the other dealerships John Eagle owns in Houston. The exception was their new Infiniti store; it’s not far from Clear Lake, yet it was devastated. Tom Durant, famous here for Classic Chevrolet, owns two Chevy stores down there, one in Houston and the other in Sugarland. At his multi-line dealership in Galveston, he sells Chevrolet, Buick, GMC, Cadillac, Toyota, Honda and Ford products. All three of his properties came through the storm with no damage at all. Everyone’s biggest concern today is how many employees can’t make it to work because their homes, cars, or both, were destroyed.

As always happens, dealers in the Dallas Fort Worth Metroplex have told us that some Houston-area evacuees staying here have purchased vehicles before returning home. But the automotive part of this equation is nowhere near a conclusion, because Harvey still has major problems to reveal. More on that in a moment.

Last Tuesday Chad Chase of Autobahn Motorcars called to ask me about the gasoline situation. At the time Houston, though still suffering from what Harvey’s constant thunderstorms had brought, was about to break out in sunshine. The reason Chase called was that his gas and diesel distributor had informed him he had no fuel to deliver that week. That’s not surprising; CNBC, Reuters, and other newswires had reported days earlier that refineries were in the process of shutting down when Harvey first came ashore, even before it dumped 24 trillion gallons of water on Houston.

Motiva, America’s largest refinery in nearby Port Arthur, was running at reduced rates instead of undergoing an orderly shutdown. It may pay a price for that decision for some time.

The next day the Star-Telegram’s Gordon Dickson reported that gasoline shortages would occur. And on Camp Bowie I noticed some stations crammed with individuals getting gasoline; at one, the line of waiting customers stretched out into Ridgmar Boulevard.

But even before that happened, I wrote to an old friend who works for a refinery group and has long been one of America’s top energy traders. Even as Harvey was wending its way from Houston back into the Gulf, on its way to Beaumont and Port Arthur, he related, America’s energy companies were already moving to get back online. As of Tuesday afternoon, 3.5 – 4 million barrels of refinery capability was still offline, but there was 229.9 million barrels of gasoline already refined and on hand; That’s almost 30 million barrels of gasoline more than were available in the same week in recent years.

The second issue was that our pipelines were down because of terminal flooding in Houston, electric outages, and in some areas, a lack of product to fill those pipelines. That included a Koch pipeline from Corpus and the Explorer pipeline from Port Arthur to Houston, Greenville, and a spur into DFW. But Valero has a pipeline from the Panhandle to our region; and Magellan has a bi-directional one out of Oklahoma to Fort Worth. More important is that, by Wednesday afternoon, even before the gasoline crisis had reached its peak, a second email showed that restarts of our Gulf Coast refineries were already underway at Valero Corpus and Three Rivers, at Buckeye in Corpus, at Shell in Deer Park, at Marathon in Texas City and Galveston, and at Valero’s refinery in Texas City.

That’s right, even as the waters were still rising in Houston and Beaumont-Port Arthur was being savaged, while gas stations in the Metroplex were running out of fuel, refineries were already in the process of being restored. As Tom put it to me in his email, the biggest problem was one of “prompt delivery.” Meaning it was not a problem of not being able to get gasoline at all, but of the gasoline not showing up before the tanks ran empty. And, because panicked customers started filling up every receptacle they had ahead of the inevitable price rise, the tanks ran dry before the next late delivery arrived.

And, of course, gas pricing reacted to this increased demand on a finite supply. Photos started hitting my email inbox of gas stations charging in excess of $4 a gallon. But at the same time, it was being reported that the refineries in Louisiana were not nearly as badly hit as those in Texas, and they were still operating. Meanwhile, gasoline prices were also jumping on the futures market — up 50 cents per gallon from before the hurricane’s landfall, the futures price peaked at $2.13 per gallon late Thursday afternoon. (The Futures market for gasoline is also the New York Harbor price; it’s a forward indicator of gasoline prices, typically predicting the wholesale price 10 days out for the rest of the nation.)

Then, however, in the middle of the night going into Friday morning, a funny thing happened: The futures price of gasoline collapsed by 40 cents a gallon within hours. By Friday morning it was back to $1.73 per gallon. Which means fuel traders believed they had seriously overbid the risk for gasoline refining and were now unwinding all their positions. By Monday morning, gasoline’s futures price was back where it had been before Harvey turned north in the Gulf.

That amazing collapse in gasoline pricing didn’t get even a mention in the news.

When I reported it on air Saturday, Congressman Michael Burgess emailed me that no one had told him Wall Street commodities traders had backed off their prediction of gasoline Armageddon. (In response, I shipped him the Bloomberg chart showing gas prices’ collapse.) The point is that, even before the gas shortage was big news in our region and before the panic to buy gasoline reached full swing, our energy companies were already working around the clock putting things back in order. And by Thursday in the middle of the night, fuel traders knew the crisis was almost over.

Now the Real Costly Problem?

The crisis isn’t over for cars. While we were focusing on gasoline, rising prices for fuel, and empty pumps, local car dealers attending one of the used car auctions last week literally had their breath taken away by the pricing for used vehicles. Some would report that prices jumped by easily $1,000, while others claim the bids were two grand higher than normal. The rumor went out that Mannheim auctions would store many of these auctions’ purchases until Houston dealers could arrange transportation to their stores down south.

At the time it was being estimated that up to 500,000 vehicles were totaled by floodwater or damage from the hurricane. On Thursday, the insurance companies announced that owners had already filed over 100,000 claims for losses on automobiles. Then the estimates kept climbing and climbing until, by the weekend, some were convinced at least 1 million vehicles have been destroyed on the coast. That I have no idea about, but typically these estimates are never quite accurate. What is undeniably true is that there aren’t enough extra new or used cars in Houston, maybe in Texas, to deal with a tragedy of this magnitude.

And there aren’t enough insurance adjusters in the country to deal quickly with what could possibly be 1 million totaled automobiles, much less the 100,000 homes ruined in Houston. While we don’t know the information from all manufacturers, Honda has already diverted its excess vehicles in port, which it always holds back for contingencies, into Houston. And it’s more than a fair bet that over the next few months, dealers across America will have their allocations of vehicles cut back to help supply the Texas Gulf Coast’s dealers. Used cars will be even harder to find and pricier; there’s only so many used cars available to begin with, which is why the auction bids for nice used cars jumped last week.

It’s worth remembering that, in the months to come — long after we’ve diverted both new and used cars into this region — many of the Gulf Coast vehicles considered totaled and purchased by insurance companies will find their way back to other markets, including ours. Do not rely on reports such as CarFax for protection; I have a long list of people who did just that, and then found out the used car they purchased had been severely damaged but never reported to that service. Instead, use the free database at the National Insurance Crime Bureau to check a VIN against flood-damaged cars; access VINCheck at https://www.nicb.org.

Even as this was written earlier this week, the flood waters are still rising in areas of Houston where reservoirs and lakes had to be drained of excess water. While we were inconvenienced over gasoline, many have lost everything on the coast. And here’s the greatest tragedy of all: It has been estimated that up to 85 percent of those who lost their homes to flooding weren’t covered for that type of damage. As in all states, possibly 15 – 25 percent of all totaled cars had no insurance on them at all. And this in a giant city where mass transit is relatively non-existent. Without a car in Houston, you probably won’t be able to return to work. And some believe there may be upwards of 75,000 foreclosures of ruined homes because they had no flood insurance.

As always, Lee Chapman of the Dallas Fort Worth Metropolitan New Car Dealers Association has put out a request to his dealer body. The request will likely be met with large donations. And that takes me back to the mid-Seventies, standing in that Olds dealer’s showroom watching Beechnut Street turn into a lake within hours, simply because of the second heavy thunderstorm in one week.

Flooding is nothing new in Houston. But Harvey, a storm that raged for days on end, has brought our friends and family in Southeast Texas nothing but unimaginable misery and devastation.

© Ed Wallace 2017

Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, bestowed by the Anderson School of Business at UCLA, and hosts the top-rated talk show, “Wheels,” 8:00 to 1:00 Saturdays on 570 KLIF AM. Email: edwallace570@gmail.com