Pipeline Outage Could Lead To Another Gasoline Price Spike

Gasoline prices in the U.S. Southeast spiked in September after a major gasoline pipeline suffered a leak and was forced to temporarily shut down. The Southeast may see gasoline prices rise again because the problems with the pipeline are not over.

The Colonial Pipeline is a 2.5 million barrel per day system that carries refined products such as gasoline, diesel, jet fuel and heating oil. It consists of a massive 5,500 miles of pipeline, traveling from the Gulf Coast up to the mid-Atlantic. Fuels refined along the Gulf Coast can reach as far as New York Harbor.

On September 9, the Colonial Pipeline system was hit with a “system integrity issue” in Alabama, the company said, and was forced to shut down Line 1. That was a euphemism for a gasoline leak in the pipeline – about 8,000 barrels leaked in Alabama – which interrupted the flow of 1.4 million barrels per day of gasoline.

That was a problem for the U.S. Southeast because “there are no refineries between Alabama and Pennsylvania that produce substantial quantities of transportation fuels,” the U.S. Energy Information Administration said in September, adding that “the U.S. Southeast is supplied primarily by pipeline flows from refineries along the U.S. Gulf Coast and supplemented by marine shipments from the U.S. Gulf Coast and imports.”

The outage of the Colonial Pipeline led to a higher gasoline prices at the pump because there are few alternatives. Some cities with ports such as Savannah, Georgia, and Charleston, South Carolina, can receive shipments from the global market, but otherwise the region is isolated. When Colonial shutdown, some retail outlets ran out of fuel. A Virginia petroleum association member told Argus Media that it was “the worst outage he had seen in 17 years.” The outage led to an 8-cent per gallon increase in PADD 1C, which covers the southeast.

Interestingly, the pipeline leak also had broader effects on the gasoline market. The disruption led to a record drawdown in gasoline stocks in the southeast. But upstream, at the beginning of the pipeline in the Gulf Coast, refined gasoline had nowhere to go. So the Gulf Coast saw a record buildup in gasoline stocks following the shutdown of the Colonial Pipeline. Gasoline prices along the Gulf Coast plunged below $2 per gallon in September as a result.

The two-week outage was the longest disruption in more than two decades for the pipeline. However, the problems with the Colonial Pipeline may not be over yet. Argus Media reports that more leaks will need to be fixed and the pipeline could shut down again before the year is out. In fact, 2016 is now the worst year in more than a decade for leaks in the pipeline system, with at least six shutdowns recorded in federal data. Another shutdown is looming. Argus Media says that Colonial will have to fix compromised segments of the pipeline in Georgia and Atlanta, which could once again send gasoline prices up.

“It is incredible … the risk profile we have with one pipeline carrying half the gasoline supply to the east coast — 70pc in many southeastern states,” U.S. energy secretary Ernest Moniz said in late September. But the Colonial Pipeline operator has not disclosed the reason for the leak or why 2016 is the worst year for leaks in years. They also have not said when they might shut down again for more repairs.

A lengthy outage could send gasoline prices up in the Southeast. On the other hand, gasoline prices could see some relief in the coming days as Hurricane Matthew barrels up the Eastern Seaboard. The Hurricane is not expected to wreck any infrastructure, so supply outages are not too much of a concern. Instead, major storms tend to put a huge dent in consumption as millions of people stay home. “This is a demand destroyer. That’s the bottom line,” Tom Kloza, global head of energy analysis at OPIS, told CNBC.

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