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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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How Risky Are Oklahoma Earthquakes For The Oil Business?

This past Sunday, an earthquake hit Oklahoma with a magnitude of 5 on the Richter scale. Earthquakes of this magnitude have the potential to cause severe damage to their surroundings, such as schools and other buildings, some of which were closed on Monday following the event in order to make necessary safety assessments. Fortunately, the quake caused no damage to the oil pipelines near the city of Cushing, but some gas leaks have been observed. Oklahoma’s regulators required all of their oil and gas pipelines to shut down following the disruption.

The Oklahoma oil is currently storing around 58,5 million barrels of oil. The hub is connected to nearly every corner of the United States, providing WTI crude to the energy market. If there are more serious earthquakes in the future, this could prove highly detrimental to the supply chain.

Oklahoma experienced a similar earthquake with a magnitude of 5.8 back in September of this year, leading to related actions taken. A pattern has begun in Oklahoma pertaining to earthquakes and will likely continue. This could cause long-term issues for oil majors in the region if disruptions are to reoccur this frequently. Earthquakes began occurring in Oklahoma in 2009, the same year fracking initiated in the state. The United States Geological Survey agency (USGS) believes these to be induced quakes caused by the continuous fracking. Dirty water used to excavate shale oil is pumped back deep into the earth’s crust to avoid more costly manners of disposal. The USGS believes several dozens of these water disposal wells have surely been the cause of these tremors. Regulators are moving to close the use of these wells, having shut down 37 wells within the vicinity following September third’s quake. Related: Oil Slides As U.S. Rig Count Surges Most In 16 Months

For individuals living in this quake filled region of Oklahoma, they should look into insurance policies to financially protect themselves against home damages. The USGS states there have been over 500 induced earthquakes this year alone, all of which greater than a 3 on the Richter scale.

Phillips 66 errs on the side of caution following several earthquakes this past year. They shut down and check their assets regularly to ensure safety. Over the weekend, their stock jumped $1.33 and climbed an additional $3 on Wednesday. Magellan Midstream Partners LP, Kinder Morgan Inc., and Enbridge Inc. all shut down operations as well. All of these companies have grown more than $1 per share aside from Magellan, which has been in a steady decline. Investors should be on the lookout for a pattern between these firms and the earthquakes throughout the state.

Immediately following the earthquake, crude oil futures on the West Texas Instrument benchmark jumped $0.38. The earthquake shutting down the pipelines signals there could be less supply entering the market thus raising the price. Investors should always be aware of earthquakes and other natural disasters because of their notoriety for disrupting oil production and distribution. Speculators should pay close attention to the seismic activity in the Midwest and no crude oil futures will react.

By Michael McDonald of Oilprice.com

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  • George on November 20 2016 said:
    Earthquake insurance is very cheap, however the insurance cps. will not cover damage due to fracking. ALL earthquake damage in Oklahoma will be listed as fracking by the ins. cos. They won't pay anything. We had the ins. but dropped it.
  • Craig Woerpel on November 20 2016 said:
    Are we supposed to believe the photograph is from an Oklahoma induced earthquake? I notice the car's license plate was conveniently cropped.
  • Herman Goodfellow on November 21 2016 said:
    The oil tanks in Cushing, OK weren't designed to survive Mag-5 frack quakes. Neither were the pipelines leading in and out of Cushing. When the big one hits, American's oil supply will go into the ground.

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