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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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Looming Gas Shortage: “Imports Can’t Make Up For This”

Out Of Gas

The East Coast will start feeling the effects of Hurricane Harvey as the gasoline supplied from the Gulf Coast starts to dry up. One of the most important pipelines that ships refined products to the Eastern Seaboard shut down on Thursday, which means that the U.S. Southeast, Mid-Atlantic, and Northeast could see supply disruptions and price increases.

The Colonial Pipeline carries gasoline, diesel and jet fuel from several refineries in Houston, Port Arthur and Lake Charles, along the Texas and Louisiana Coast, up through the U.S. Southeast to Washington DC, Baltimore, and New Jersey.

The pipeline had been operational through the worst of the Hurricane, easing fears about supply disruptions. But the outages at the nation’s top refineries along the Gulf Coast have forced the Colonial Pipeline company to announce on Wednesday that it was shutting down Line 2, which carries diesel and jet fuel due to “supply constraints.” And on Thursday, the company shuttered Line 1, the pipeline that carries gasoline. The pipeline company said that operations would only resume when it can “ensure that its facilities are safe to operate and refiners in Lake Charles and points east have the ability to move product to Colonial.” 

It is hard to overstate the critical role that the Colonial Pipeline plays. It carries 2.5 million barrels of refined products per day, or as the FT notes, “roughly one in every eight barrels of fuel consumed in the country.” More importantly, it is one of the only suppliers for major cities on the eastern seaboard, including New York, Washington DC and Atlanta.

Related: Can Mexico Capitalize On This Golden Oil Opportunity?

“With no refineries between the Gulf coast and Pennsylvania, the south-east is largely dependent on pipelines from the Gulf coast for their fuel, with Colonial being the largest,” Jason Bordoff, the director of Columbia University’s Centre on Global Energy Policy, told the FT. “With Colonial shut and a quarter of Gulf coast refining capacity out, the south-east will need to get fuel from storage, other forms of transport from the Gulf like trucks and ships, and imports. Consumers will see the impacts of these disruptions and higher cost alternatives in higher prices paid at the pump.”

It is unclear when the refineries will be able to come back online, but there are some signs of recovery. Corpus Christi, a major refining and oil import/export center that was slammed by the hurricane, is starting to bounce back. According to IHS Markit, the city is “faring the best” among the cities on the Texas coast that were badly hit, with its four major refineries set to resume operations this week.

But that does little for the Colonial Pipeline, which depends on refineries further up the coast along the Texas-Louisiana border, an area that was dealing with catastrophic flooding mid-week.

The disruption of nearly a quarter of the nation’s refining capacity has already led to a spike in gasoline prices. But gasoline futures continue to surge, made worse by the shutdown of the Colonial Pipeline. During midday trading on Thursday, gasoline futures for September were up nearly 12 percent.

“It’s one thing to not have refiners,” Dan McTeague, an analyst at GasBuddy.com, told Bloomberg. “It’s quite another thing to not have pipelines.”

Consumers along the East Coast will soon see the effects. Bloomberg reports that Valero Energy has stopped supplying gasoline stations that are not Valero-branded outlets. Shell has reportedly also curtailed fuel supplies at the retail level.

East Coast refineries are struggling to keep up as the gap has grown too big. Reuters reported that at least two refineries on the East Coast are out of gasoline. “I’ve never seen a situation this bad,” one East Coast market source told Reuters.

In the short run, refiners from Europe and Asia could help fill the gap, sending supplies to the U.S. East Coast. But the Reuters source says refiners abroad won’t be able to resolve everything. “Imports can’t make up for this. ... This is going to be the worst thing the U.S. has seen in decades from an energy standpoint.” It should be noted, however, that many market watchers view the supply disruptions as temporary.

Related: Russia’s Comeback In The LNG Race

When things get back to normal, there will be strong demand for both crude oil and refined products. WTI has suffered a heavy discount relative to Brent, so the U.S. will have no problem finding customers, even as far away as Asia. And so far, there has not been reports of major damage at the Gulf Coast refineries, although with flood waters still in the Port Arthur area, it is still unknown how quickly they will return to operation.

There are some reports as of Thursday that the Colonial Pipeline could resume operations within days, which, if true, could prevent the gasoline shortage from getting too bad. 

The federal government is also trying to accelerate the recovery. With an eye on the nation’s fuel supply, the Department of Energy authorized a release of crude oil from the strategic petroleum reserve in order to help Phillips 66 get its Lake Charles refinery up and running. The SPR release is reportedly an “emergency exchange agreement” – a swap or a long of sorts – in which Phillips 66 has to pay back in crude at some point in the future. Phillips 66 will receive 500,000 barrels (200,000 barrels of sweet and 300,000 barrels of sour) of oil for its refinery.

By Nick Cunningham of Oilprice.com

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  • Dan on August 31 2017 said:
    The roads are getting busy already for the holiday weekend, even as cold as it is.
  • Oilracle on August 31 2017 said:
    The author has not touched on how much solar and wind electricity was produced in the Huston area during these days. Shame!
  • Crazy Uncle on August 31 2017 said:
    Nick, EIA had 23.7 days of supply on 8/25/2017. Where is all the supply? One would think it would be near pipelines. Please investigate.
  • Kr55 on September 01 2017 said:
    These kinds of events highlight how the EIA needs to separate usable and unusable commercial stocks in their data. Not sure if people realize how much of the millions of barrels of gasoline and crude in the EIA data is not usable. It exists to keep pipelines full and terminals that ensure consistent flows between locations. Those stocks cannot be used by anyone, they have to exist until the infrastructure is shut down. This is why all these stocks that the media pumps up as the end of the world actually end up being useless in a crisis. Like what it happening with gasoline right now, there is a big wakeup call coming for crude.
  • Jeffrey J. Brown on September 01 2017 said:
    The response from Texas state officials, notably one of the Texas Railroad Commissioners, to the gasoline supply situation has been, to put it charitably, rather curious.

    Basically, the message is that there is no shortage, keep up with your happy motoring, and spot shortages are due to everyone rushing to fill their tanks up (this is a factor, but IMO it'a minor factor).

    The Commissioner apparently based his advice on the gasoline inventory number of 230 million barrels. However, this is the gross inventory number. The net available inventory is the supply of gasoline in excess of the Minimum Operating Level (MOL), which the former head of the EIA puts at about 200 million barrels. In other words, with no refinery output, we would deplete the net available gasoline inventory in the US in only three days.

    So--assuming that Texas, prior to the hurricane, also had about three days of supply in excess of the regional MO--with 60% to 80% of Texas refining capacity shut down, it's easy to see how supply shortages would appear only a few days after the refineries began to be shut down, which is exactly what happened.

    Obviously, this is a temporary situation, which will be resolved once most of the Gulf Coast refineries come back on line, but the Corpus refineries are only just now initiating startup procedures, and it will be additional days to weeks before the Houston and Beaumont/Port Arthur refineries are back on line.

    In the mean time, IMO Texas officials should be advising Texas motorists to try to curtail non-essential driving, instead of implicitly encouraging business as usual driving patterns, especially at the start of the Labor Day weekend.

    The bottom line, according the former head of the EIA, is that an assertion that we have abundant supply--based on the 230 million barrel gasoline inventory number--is categorically wrong and profoundly misleading.

    It's entirely possible that there could be a lot of very angry Texas motorists stranded on the road on Labor Day, who can't get back home because of gasoline shortages--after they relied on assurances from state officials, and from large portions of the media, that there is no shortage of gasoline.
  • snoopyloopy on September 01 2017 said:
    A lot of people are going to seriously give an EV a second (and third) look, especially in the Southeast where they've been hit by disruptions on the pipeline a couple times in recent years. Plus, numerous models are just starting to hit the streets that offer the opportunity to be actually affordable and competitive.
  • Jeff in dallaS on September 02 2017 said:
    Reply to Jeffrey about gasoline supply disruptions in Texas...
    Here in Dallas we have seen shortages but not due to supply disruptions. Due to demand as everyone panicked. The day everyone panicked was Thursday which led to ling lines at the pumps and gas stations running out. The majority of gas stations ran out and it was hard to find gas. That lasted about 12 hours. The supplies kept rolling in and the stations had gas again. Then Friday was less panic and less demand. Still some lines at the pumps and some stations running out again. Then supplies rolled in once again and everything back to normal this morning, mostly.
    What we've seen is crazy demand caused by panic but have not seen supply shortages. The trucks are rolling in faster not slower.
  • Jeffrey J. Brown on September 02 2017 said:
    Re: Jeff & No Shortages

    So, if we assume that the net available gasoline inventory in Texas is similar to the nationwide number, about three days of supply in excess of MOL, and we then lose 60% to 80% of Texas refining capacity, as a consequence the refinery shutdowns have absolutely no impact on gasoline supplies. Got it.

    And Quick Trip announced on Wednesday, before the big rush, that they were cutting off gasoline supplies to half of their DFW stations. I guess they decided that they had too much gasoline to sell. Got it.

    And the Dallas Morning News reported that according to Gas Buddy data, as of 11:30 AM Saturday morning, out of 449 gas stations surveyed in the Dallas area, 62% had no fuel. I guess that they were just refusing to accept delivery of gas. Got it.
  • Jeffrey J. Brown on September 02 2017 said:
    Interesting difference of opinion between Texas state officials and ExxonMobil:

    Star Telegram: Gas prices still rising, many stations empty as holiday weekend begins
    September 1, 2017

    Exccept:

    Texas Railroad Commissioner Ryan Sitton on Thursday urged Texans to go about their business, saying there was no fuel shortage, but rather just a temporary distribution challenge.

    But others urged Texans to avoid unnecessary travel to conserve a limited fuel supply.

    “Consumers are encouraged to be conservative with fuel use to help preserve supplies for first responders and other critical users,” ExxonMobil, which has had three facilities in Baytown, Beaumont and Lake Charles, La., shut down by the storm, said in a statement.

    Read more here: http://www.star-telegram.com/news/traffic/gas-prices/article170874572.html#storylink=cpy
  • Jeffrey J. Brown on September 03 2017 said:
    Refinery Update

    As of September 2, 2017, Platts estimated that approximately 60% of Texas refining capacity remained shut down (3.2 million bpd shut down out of 5.6 million bpd capacity):

    https://www.platts.com/latest-news/oil/newyork/oil-factbox-texas-refineries-pipelines-ports-21824122
  • Jeffrey J. Brown on September 03 2017 said:
    On Friday, only one of the five gas stations* on the periphery of our neighborhood in Fort Worth had gas.

    I thought I would do the same drive two days later to see what kind of (presumed) improvement in availability we had, and there was a change.

    As of 12:30 Sunday afternoon, none of the five gas stations had any gas.

    So, it's important to remember, THERE IS NO GAS SHORTAGE.

    It's just that none of the gas stations on the periphery of the neighborhood had any gas, as of 12:30 PM today anyway.

    *Murphy USA, Shell, Glad Mart, 7-11 and ExxonMobil.

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