Gasoline shortages highlight U.S. dependence on Colonial pipeline

NEW YORK (Reuters) - Drivers from Tennessee and Georgia to New Jersey may soon breathe a collective sigh of relief as service is restored on Colonial Pipeline, cutting gasoline prices that have surged following a leak on the key line.

Out of fuel signs are pictured on gas pumps at a Twice Daily Shell station on West End Ave. and N. 17th Ave. S. in Nashville, Tennessee, U.S. September 17, 2016. REUTERS/David Mudd

Still, the 12-day disruption on Colonial, the main artery that flows about 1.3 million barrels per day of fuel from the refining hub on the Gulf Coast to cities all the way up to the East Coast illustrates the impact even a relatively brief disruption can have on gasoline prices.

The largest gasoline conduit in the United States was partially shut down after a leak was discovered on Sept. 9 in Alabama, and motorists have since suffered long waits to fill up at stations across the southeast. The line was scheduled to restart Wednesday evening, the company said.

As U.S. benchmark gasoline futures spiked nearly as much as 10 percent on the supply disruption, prices at the pump jumped in Alabama, Georgia, and Tennessee, where states of emergency were declared in the wake of the fuel line’s rupture.

In Georgia, for example, gasoline rose by more than 30 cents a gallon in the wake of the leak, according to motorist advocacy group AAA.

“When you’re very dependent upon one source and that source has problems, it can lend itself to supply problems,” said John Mays, director of special studies for Turner Mason & Co, a Dallas-based consultancy. “Colonial has been a very reliable source - it is such an unusual event for Colonial to have downtime like this.”

Over the past two decades, Colonial has had only one other major spill, according to federal pipeline safety records.

In that time, however, the East Coast has become increasingly dependent upon that line as oil companies have shuttered refineries in New Jersey, Pennsylvania, Virginia, St. Croix and Aruba, cutting off over 800,000 bpd of refining capacity that previously served the region, providing alternative gasoline supplies.

Colonial is now responsible for supplying about a third of the 3.2 million bpd of gasoline consumed on the East Coast, according to data from the U.S. Energy Department.

Gasoline is also imported to the U.S. eastern seaboard from Europe and Canada, which accounts for an additional 600,000 bpd of fuel. The five refineries that still operate in the region can produce a total of about 700,000 bpd of gasoline. Other pipelines and domestic shipments account for the rest of the region’s supply.

When Colonial is disrupted, major ports with significant gasoline storage, like New York Harbor may initially be insulated from jolts in prices that affect other areas. Refined products in storage in New York Harbor can be released by suppliers, as additional gasoline is sought from Europe and other areas.

The reliance on Colonial is also related to cost.

Transporting fuel from Gulf Coast refineries by ship can be prohibitively expensive, because domestic shipments must be made on tankers that are built in the U.S. and meet other costly requirements under the Jones Act.

Refining oil in Europe and transporting the products can also cost more because generally European refineries are less efficient than Gulf Coast plants.

“Colonial is a large part of the infrastructure mix - it is the most cost-effective way to get gasoline from a major refining center to a major consumption center,” said Skip York, a consultant with Wood MacKenzie in Houston.

Pipeline construction in the United States has become controversial. Natural gas pipelines proposed to run from the Marcellus shale in Pennsylvania have met with vitriolic opposition, and crude oil pipeline proposals, including Keystone XL and most recently, the Dakota Access pipeline, have been blocked.

Alternative gasoline pipelines to the East Coast have not been proposed in recent years, due to the combination of Colonial’s efficiency and the difficulty of building new products pipelines.

“It’s the penalty of success that Colonial has been able to build up so much capacity,” said Turner Mason’s Mays.

Reporting By Jessica Resnick-Ault; Additonal reporting by Devika Krishna Kumar; Editing by Marguerita Choy