Many gas stations on the East Coast are reported to face significant fuel shortages. Some drivers have responded by accumulating fuel, which worsens the problem. The underlying problem is a ransomware attack that managed to shut down Colonial Pipeline. This is critical infrastructure for gasoline supply, distribution, and logistics fees in the US.
Last Tuesday, GasBuddy reported that up to 10% of gas stations in North Carolina, South Carolina, Georgia and Virginia were facing fuel shortages. Panic buying was increasing the shortage and inspiring other shoppers to rush to the stations to fill their tanks. Tiffany Wright of AAA Carolinas has criticized irresponsible behavior at the gas station.
US Secretary of Energy Jennifer Grandholm has been directing calls to prevent hoarding. The pipeline is responding to the crisis by trying to resume operations as soon as possible. Gasoline demand has increased so much that the GasBuddy gas supply tracking app experienced outages due to oversubscription and logistics fees.
What is the fuel shortage and what are its consequences in terms of logistics fees?
The Colonial Pipeline is a vital resource, and it is not surprising that any disruption to its operations is going to have major repercussions. This is one of the largest and most important refined products pipelines in the entire US It transports more than 100 million gallons of fuel over 5,500 miles to Houston, Texas and New York. Approximately 45% of all fuel consumption on the East Coast depends on the Colonial Pipeline, which serves more than 50 million people.
The pipeline carries many grades of gasoline, domestic heating oil, diesel, military fuels, and jet fuel using its underground facilities. There are several tank facilities for receiving, storing and delivering products. Market reaction has been surprisingly quiet according to James William of WRTG Economics. There is hope that if supplies are restored over the weekend, there will only be occasional shortages.
Impact on gas prices
Reports indicate that gasoline prices are reaching $ 3 per gallon, a 20% increase from the previous week. Demand in the affected states has increased by more than 40%. Some consumers fear facing long lines for fuel that may not be available. So many are changing their travel patterns to save fuel and make sure they don’t get stuck on the road.
Some categories of fuels face more shortages than others, reflecting diversity in demand and consumption. There are states like Tennessee and Alabama where the crisis appears to be nothing more than an incident that affects less than 2% of the stations. Nationally, the outlook is more worrying with prices rising almost $ 3. This is the highest level that logistics fees have had in the last 6 years.
Futures markets were disrupted by the news and reported many gains and losses over a relatively short period. Ultimately, the markets settle no more than 2 cents above the anticipated average for the season. Gasoline prices are expected to remain strong in the mid-Atlantic. For example, the east coast averaged about 825,000 barrels per day in April. This is 50% more than the 3-year average.
The markets are currently calm, but will panic if the crisis is not resolved soon. US gasoline inventories are comfortable now, according to Peter McNally of The Bridge. For example, reported supplies are only 3% below expected averages. However, a peak demand season is approaching starting Memorial Day weekend. It’s only 3 weeks away and it would cause problems if the crisis is not resolved by then.
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Impact on logistics prices
The fuel shortage would be disastrous for the logistics industry. Colonial Pipeline’s Joseph Blount has privately warned state officials of this possibility due to the ransomware attack. The good news is that the company has control over the pipeline. Contingency action includes working with traders, refiners, and retailers to avoid further disruptions.
A portion of the pipeline is manually operated from North Carolina and Maryland to prevent cyberattack. Expectations are full service for the weekend. Any increase in prices will hit carriers hard. If there are empty gas stations, goods will no longer be transported and a major crisis could arise. Inherent vulnerabilities in the energy sector are being exposed and logistics companies are one of the victims.
Respond and plan for the future
Investors are taking stock of developments and responses without panicking. For example, RBOB gasoline futures didn’t change much last Friday. Analysts believe that now there are no real alternatives to transport the fuel. One of the possibilities is to use tanker trains and trucks to get fuel from the Midwest. However, that would be a poor replacement for the 1.5 million barrels of gasoline and 1 million diesel / jet fuel a day handled by the Colonial Pipeline.
Some states like Florida can get fuel using barges from Houston, Louisiana or New York. In fact, some fuel could be imported from Europe. The choice of rail cars is limited because no one anticipated this crisis. The time delay involved would not be practical. Some have talked about using ships to bring refined product from the Gulf Coast to the Northeast for the long term.
This would be possible if the provisions of the Jones Act were waived, according to Michael Tran of RBC Capital. The law penalizes freight transportation between points in the US Such an exemption was activated in 2012 by the Department of Homeland Security after Superstorm Sandy.
The problem with activating emergency transport is that it could be too efficient for its own good by creating an oversupply of fuel. However, the Department of Transportation is responding by offering more flexibility for motor carriers and drivers. Exemptions include hosing to certain states where drivers can work longer than the typical 11-hour limit.
The ransomware that infected Colonial Pipeline systems has caused panic buying. This is likely to cause or increase fuel shortages. Because the logistics industry relies on fuel transportation, there is hope that the crisis will be resolved quickly enough not to affect the supply chain. In the long term, vulnerabilities in the energy sector are likely to be reviewed so that these weaknesses can be remedied.