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Implications of a 10 Day refinery Outage

Insight 1. Even before Hurricane Ike hit, inventories were very low. According to EIA data, gasoline inventories the week that Hurricane Gustav hit were the lowest that they had been since 2000, amounting to 187.9 million barrels, or about 21 days supply. Quite a bit of this inventory is needed just to keep the pipelines filled. EIA does not publish information as to how far inventories need to drop before we start seeing outages, but it is clear that we have now reached the point where shortages are developing. Insight 2. Friday, September 12, before Hurricane Ike hit, there were already gasoline shortages in some parts of the country. These occurred primarily because of the earlier impact of Hurricane Gustav. Even though Hurricane Gustav hit on September 1, its impact on petroleum product supplies were not felt immediately, because some inventories were still available, and because it takes a while for shortages to work their way through the pipeline. Gasoline traveling by pipeline from Texas to New Jersey takes an average of 18.5 days to make the trip, so it shouldn't be surprising that it took 11 days (from September 1 to September 12) for the Hurricane Gustav shortage to start to be felt. Insight 3. Since Hurricane Gustav hit, there has been a drop in refinery output of 1 to 3 million barrels a day. The Department of Energy releases daily reports showing the amount of refinery capacity in the hurricane area that is shut in and the amount subject to reduced runs. We cannot know to what extent runs are reduced. For the purpose of Figure 2, I have estimated that reduced runs have the impact of reducing production by one-third. The amount shown in the graph is a rough estimate of the amount by which refinery production will decrease. It is not exact because: (1) We don't know the extent to which production was reduced under reduced runs. (2) I haven't adjusted for expected refinery utilization rates, without the hurricane. (3) The data is only for the hurricane area. It is likely that the hurricanes have changed refinery production elsewhere - some increases (greater use to offset shutdowns) and some decreases (because of unavailable crude). Insight 4. It is likely that we will have product shortages for at least the next three to four weeks, because of shut in refinery capacity and reduced refinery runs. I have said that it is likely to take a week or two to get refinery production up to pre-Ike levels. Suppose it takes 10 days. Adding 10 days to the date of the hurricane (September 12) brings us to September 22. If it takes an average of 18.5 days to get product from Texas to New Jersey by pipeline, it will take until approximately October 10 before supplies are back to normal. It could be a little shorter than this, or quite a bit longer. Insight 5. One of the biggest refined product pipelines, Colonial Pipeline, is now reported to be shut down, because of lack of refined product input. Colonial pipeline is one of the largest pipelines, with a capacity of 2.4 million barrels a day. It serves the Southeast and the East Coast. Until Colonial pipeline is back to carrying full capacity of gasoline, diesel, and other refined products, there are likely to be shortages along the gulf coast and the Southeast. The Northeast may also begin to see shortages. Other major outages have also been reported. Explorer pipeline, carrying 700,000 barrels a day of petroleum products from Texas/LA to Indiana, is completely shut down. Plantation pipeline, carrying 600,000 barrels a day of petroleum products from Louisiana to Virginia, is operating at reduced rates. Insight 6. The lack of refined product (gasoline, diesel, jet fuel) is what is driving pipeline outages. Until there is enough refined product, some of the pipelines will be short of products to ship. In the immediate aftermath of Ike, lack of electricity may also interefere with the operation of some pipelines, but it is too soon to have information about these disruptions. Insight 7. Areas with pipeline disruptions are likely to experience shortages of all refined products, not just gasoline. While gasoline is the product that is in short supply most quickly because of lower inventories than some other products, eventually diesel and jet fuel can expect shortages as well. Cont.....

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