It is clear by now that Hurricane Harvey's biggest impact on the U.S. energy industry concerns logistics rather than raw supply. Prices tell the story succinctly:
The Upside Downstream
Hurricane Harvey's impact on refining and pipeline assets means crude oil is bottled up, depressing its price, while prices of refined products have jumped
Note: As of Thursday morning, August 31, 2017. Changes in current Nymex futures price.
Roughly half of that weekly gain in gasoline prices came on Thursday morning alone. The reason was news that the Colonial Pipeline was shutting down. Colonial is one of the most critical pieces of energy infrastructure in the U.S., able to transport about 2.5 million barrels a day of products such as gasoline and distillate from the Gulf Coast to the East Coast, supplying big demand centers stretching from Atlanta to New York City. But with about one-sixth of U.S. refining capacity offline in the Gulf region, the barrels to fill the pipeline just aren't there.
If you live on or near the East Coast, don't be surprised if you see some drivers filling up jerry cans today as they partake in that great American pastime known as fear of gasoline shortages. And one region where drivers may be feeling particularly nervous is the Southeast.
That's because states such as Georgia, the Carolinas, West Virginia and Virginia rely overwhelmingly on fuels piped in from Texas and Louisiana (most of Florida's supply is shipped into its ports). There is only one refinery in the region -- in Newell, West Virginia -- and it's a niche plant that doesn't produce much in the way of transportation fuel. Only a trickle enters the region's ports, equivalent to less than 5 percent of consumption in 2013, according to a report prepared for the Department of Energy published early last year.
So when it comes to driving around south of Washington D.C., the Colonial Pipeline really is too big to fail. The Plantation Pipe Line, which runs along much of the same route and is owned by Kinder Morgan Inc., is still running, as it starts in Louisiana rather than Houston. But its capacity is only around a quarter that of Colonial.
Yet, in what has become an established theme when it comes to the U.S. oil market, the Southeast does have a decent cushion of oil in storage to help it weather the storm -- provided it doesn't last too long.
The chart below shows how much gasoline was stored in the region -- including Florida this time -- in May relative to regional demand. May is the latest data available in this way due to lags in the Energy Information Administration's collation of regional demand figures. As you can see, there was enough on hand to meet just over 19 days of consumption, the highest for the month of May since 1994:
Gasoline stocks in the Southeastern U.S. entered the summer at their highest level relative to demand for that time of year since the mid-1990s
Source: Energy Information Administration
Note: Gasoline stocks divided by average monthly demand implied by the EIA's "prime supplier" sales data for the "Lower Atlantic" states.
Here is the same chart for distillate fuel, roughly three-quarters of which is consumed as diesel for cars and trucks in the region:
The region's coverage of distillate demand in May, on the other hand, was its lowest level for that month since 2008
Source: Energy Information Administration
Note: Distillate stocks divided by average monthly demand implied by the EIA's "prime supplier" sales data for the "Lower Atlantic" states.
So while prices for fuel will rise across the region for days to come, diesel looks like more of a pricing hot-spot than gasoline for now. Much will depend on how quickly Colonial comes back; Bloomberg News reported on Thursday morning that supply from Houston may start up again by late Sunday.
If it does, then the cushion built up in recent years should serve its purpose and calm drivers' nerves across the Southeast. Equally, it would provide another reason to be wary of bidding up stocks of refiners even further on the expectation of windfall profits.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.