Major natural disasters will always affect the global economy

However good globalization is for trade, it has a different effect when it involves natural disasters.

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BY ANTONY MUTUNGA

Time and again, natural disasters have continued to be a thorn in the flesh humanity, proving the fact that we are truly all subject to Mother Nature. As time goes by, climate change has continued to take place causing natural disasters to increase all over the world. According to the World Bank, these incidents have managed to increase by 30% since the 1960s.

Over the years some of the natural disasters that occurred have been so devastating that they have managed to change the planet in one way or another. In 2011, for instance, Japan was hit by one of the worst earthquakes in the world, which caused the earth’s axis to shift thus leading to the shortening of the length of the day.

Apart from affecting the world as a whole, natural disasters also cause a change to the global economy. Even though it has long been perceived that natural disasters only tend to affect the geographical area they hit, this is not entirely true. In this current era where the world has become increasingly interconnected, each individual economy is connected to another in one way or the other. However good globalization is for trade, it has a different effect when it involves natural disasters.

The 2011 Tohoku earthquake in Japan and the Thailand floods affected the global economy. In the case of Thailand, most of the factories in the region were flooded causing the price of most hard-disk drives to double around the world. Thailand is the world’s second largest producer of hard-disk drives, accounting for approximately 25% of the world’s production. The price hike was experienced all over the world for the following two years till the major factories were able to get back on their feet.

On the other hand, the earthquake in Japan saw a lot of disruption; first of all, the local stock market index took a slump. It was then followed by a fall in other country’s stock market indices including the German DAX and the South Korea Kospi index. The costly natural disaster also caused oil prices to drop as the country had its oil refineries closed.

However, not all disasters affect the global economy, the effects tend to vary depending on their magnitude. This year has already seen several major disasters hit several locations around the world from the heavy monsoon rains in the South Asia, mudslides in Africa to hurricane Harvey and Irma hitting the United States. These major disasters have not only left behind a lot of damage in the geographical areas they hit but they also have an impact on the global economy in one way or another.

Firstly, the hurricanes affected the energy sector. When hurricane Harvey hit landfall it heavily affected the state of Texas, which holds some of the refineries in the country. The hurricane in the state caused more than 10 refineries at the Gulf Coast, which represent about 22% of the U.S refining capacity, to be temporary shutdown while others reduced their operations. The refineries that were temporary shutdown include the largest refinery in the state, Motiva Port Author, Valero Energy and ExxonMobil refineries. Apart from this, the Colonial Pipeline, which is used to transport fuel to the East Coast, shut down the main lines, as there was less fuel to be transported.

Over the years, the U.S had turned into a net exporter of gasoline and diesel, challenging even Russia and Saudi Arabia, to countries such as Brazil, Belgium, China and Mexico. Therefore, in order to be able to supply to the markets that are usually supplied to by the Gulf Coast, other refineries in the country had to work at a higher rate. This in turn led to some of the refineries running out of gasoline for immediate delivery.

Before Hurricane Harvey hit the U.S, its oil fields were able to produce about 2.6million barrels of refined products a day, more than what some of the Organization of the Petroleum Exporting Countries (OPEC) were producing. This saw it become an alternative to OPEC for traders. However, with the fully operating refineries running out of gasoline due to the closure of some of the main refineries, the buyers who had depended on the U.S started scrambling to cover. This closure also caused a slight increase in the global price of oil, and in doing so the cost of living in some areas went up.

Apart from affecting the supply of gasoline, the storm also caused a problem in the export of liquefied petroleum gas (LPG) to Asia. With the Gulf Coast shutdown, at least 300,000 tonnes of LPG shipments were delayed. Asia was already experiencing a shortage of LPG, which in the terms of butane or propane is used in different ways such as for powering transportation systems and producing petrochemical. As the storm kept causing the delay, traders like South Korea’s SK Gas and China’s Oriental Energy had no other choice but to get LPG from the Middle East and West Africa in order to ensure that their inventory is not affected.

This however did not come cheap as the prices had gone up as a result of the delays in the U.S. Saudi Aramco for example, the most valuable company in the world by market capitalization, increased its prices of butane and propane by $40 to $60 a tonne. On the other hand, the disaster in South Asia will see public funds reallocated to reconstruction and repairs, thus some exports and imports will become more important than others. This will see some economies lose out until the countries affected recover.

Despite the negative impacts brought about by the storm, some countries will benefit. For example, oil from OPEC will be more in demand until the U.S recovers from the hurricanes. Additionally, in order to reconstruct and make repairs to the damaged regions, a lot of materials will be needed thus countries with the required commodities will benefit as the affected nations import materials from them.

It is high time that countries all over the world prepare for the aftermath of natural disasters. In this interconnected world, one country ends up affecting more countries creating a chain that in the end affects the entire world. With the climate continuing to change, the natural disasters are expected to get worse and worse in the coming years. Individual economies should be prepared for worst disasters and do away with the idea that natural disasters do not affect the world as a whole.