The Fuse

Colonial Pipeline Shutdown and SPR Release Highlight Ongoing Energy Security Risks

by Matt Piotrowski | August 31, 2017

  • NYMEX spot gasoline prices up more than 25 percent in the last week
  • Twenty tankers from Europe to help make up for lost volumes from Colonial shutdown
  • Phillips 66 refinery in Lake Charles to receive SPR crude
  • “No country, no matter how large its oil and gas production may be, is fully insulated from the risk of an energy supply disruption”

The extensive damage that Hurricane Harvey has done to the U.S. energy sector is becoming clearer. The harm is far and wide. Major refineries in the country have been shut, the largest U.S. pipeline of refined products has gone offline, crude oil production outages and logistical bottlenecks have led to a release from the Strategic Petroleum Reserve, and motorists will be pinched when filling up at the pump for some time.

The shutdown of the Colonial Pipeline, which carries gasoline from Texas to high-demand centers on the East Coast, is the latest shock to the system. Spot gasoline prices on the NYMEX have soared, with the news of Colonial adding another jolt, helping push the market up by more than 25 percent in the past week. The Colonial is connected to 26 refineries and transports more 100 million gallons of refined products per day.

Consumers will take hits in the coming week as the tighter market ripples throughout the entire country. The pipeline going offline comes on top of roughly 25 percent of the country’s refining capacity getting shut, with the largest U.S. plant—Motiva’s Port Arthur refinery—reportedly expected to be offline until mid-September. The upstream sector has not been hit as hard as refineries and the price for crude oil has remained level, for the most part. But there are still crude oil market distortions, with one refiner so far needing supply from the SPR to operate its plant. The Department of Energy authorized a release of one million barrels of crude oil from the SPR Thursday to Phillips 66’s refinery in Lake Charles, Louisiana.

The SPR’s size should not be cut for revenue purposes, since it remains an important cushion against global price shocks and supply disruptions even while the U.S. is seeing domestic supplies increase.

The current outages and the use of the SPR reinforce the importance of emergency stockpiles. As part of its 2018 budget, the Trump administration proposed selling half of the SPR in the next decade to help reduce the deficit. But the SPR’s size should not be cut for revenue purposes, since it remains an important cushion against global price shocks and disruptions even while the U.S. is seeing domestic supplies increase.

Structural energy security vulnerabilities

Given that Houston, a major corporate hub and refining center, will remain underwater for weeks, the energy situation will likely deteriorate before the outlook improves. Besides energy infrastructure taking hits, the corporate headquarters of many energy companies are located in the Houston-area and have also likely been hurt by flooding. It’s too soon to know the scope of the damage, but some major oil firms may have lost valuable data and information.

The U.S. should see some relief from weakening demand due to higher prices and the end of the summer driving season. Furthermore, an armada of tankers in Europe is now sending gasoline to the U.S. Bloomberg reported that since Harvey hit the Texas coast late last week, 20 tankers have loaded in Europe to ship gasoline to the U.S.

But even if the market eventually sees a major downward correction in the coming weeks or months, the damage and lessons of this catastrophic event will endure for years.

The outages—whether in the downstream, midstream, or upstream sector—and the subsequent price volatility provide a reminder that despite the enormous changes on the U.S. supply side over the past decade, the country is still dealing with energy security vulnerabilities.

Outages from Hurricane Harvey and the subsequent price volatility provide a reminder that despite the enormous changes on the U.S. supply side over the past decade, the country is still dealing with energy security vulnerabilities.

The shale boom—along with the growth in refining capacity and the sharp drop in petroleum net imports—has made the U.S. more energy secure, but it has also clouded structural problems of petroleum dependence and how the country’s economy can still experience major harm from geopolitical or weather outages. The latest gasoline price spike reinforces the need to diversify the transportation sector so that it is not beholden to only one supply source—petroleum. “No country, no matter how large its oil and gas production may be, is fully insulated from the risk of an energy supply disruption,” wrote Antoine Halff for the Columbia University’s Center on Global Energy. “The flipside of US energy ‘dominance,’ and more specifically of the phenomenal US ramp-up in oil and gas production, refining activity and petrochemical output unleashed by the shale miracle in the last few years, may thus paradoxically be, in some ways, heightened energy vulnerability.”

After major storms in the past, with Hurricane Katrina in 2005 the most notable, the industry learned valuable lessons, including shoring up infrastructure to deal with flooding. Given the industry’s resilience, it will make the necessary changes in the aftermath of Harvey’s damage. But not until there’s an overhaul of the transportation system will there be true energy security.

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