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 How Hurricane Sandy Affected the Fuels Industry

Following a natural disaster such as a hurricane, significant attention is understandably placed on the price and availability of fuel at the corner store. And while the focus is on the retail fueling location itself, the fueling station is the last of many links in the petroleum distribution system that can be affected — and the one that has the least amount of control over the availability and price of fuel.

The gasoline supply chain has five main parts: producing or importing crude oil, importing gasoline, refining the crude oil into gasoline, blending gasoline with ethanol at distribution terminals and selling the gasoline at retail stations. Between each part, various storage and distribution logistics steps are involved to move and store both crude oil and gasoline. The U.S. Energy Information Administration has developed a backgrounder that examines how weather and other events can create disruptions.

When disruptions occur, retailers (many of whom receive multiple shipments each day) are susceptible to changes in product availability and volatile wholesale prices. Branded fuel retailers may incur price increases and be put on volume allocations. Meanwhile, unbranded retailers may experience more dramatic wholesale price increases, since they must compete for limited supply on the spot market, or be denied access to supplies completely. In either case, retail prices react.

Add to that consumer sensitivity related to real or perceived price hikes. Several states that have emergency-triggered price gouging laws complicate retailers' abilities to absorb and pass through changes in the wholesale cost of product. For instance, in New Jersey, prices are considered excessive if they are more than 10% above the price prior to the state of emergency and prices are allowed to be changed only once per day. During and after an emergency, everybody is watching fuel prices more closely. However, rarely do retailers try to rip off the communities in which they operate — the vast majority tries to respond to a difficult situation as effectively and efficiently as possible.

Sandy Was a Very Unique Storm
Sandy, can't you see I'm in misery? — "Sandy," from the 1978 movie Grease

Hurricane Sandy was unlike any storm in recent memory. Like many hurricanes, it hit some of the country's refining capacity — about 7% of U.S. refining capacity was in the path of the storm. However, it really was a storm that struck the customers, not the producers, of fuel. Damage to the refining infrastructure was really not much of an issue, unlike in 2005 with Katrina and Rita. The issue was about power and distribution €" getting supply to those who needed it.

As Hurricane Sandy approached the U.S. mainland in late October 2012, warnings were issued to a staggering 60 million people — one-fifth of total U.S. population, and roughly one-fifth of the country's retail fuel outlets. The storm's ultimate affect was devastating. Customers in 15 states — as far west as Ohio — lost power. At one point, more than 8.3 million commercial and residential customers were without electricity — including 2.6 million in New Jersey and 2.1 million in New York. Many of these customers were gas stations, fuel terminals and even pipelines.

In the days immediately following the storm, millions of customers remained without power; gas stations saw lines that were, in some cases, miles long; odd-even gas rationing was implemented for the first time since the 1970s and elected officials were pressured to take steps to ensure that the misery caused by Sandy never happens again.

The impact of Hurricane Sandy was felt even before it crashed ashore near Atlantic City, New Jersey, on the night of October 29. In the days leading up to landfall, demand for gasoline and other essentials spiked. Fuel retailers saw demand significantly increase, with some stations reporting that daily demand had doubled. As a result, many retailers were either low on fuel — or had no fuel — when Sandy hit. State of emergency declarations also shut down highway traffic in the last few hours before the storm, which curtailed last-minute deliveries of fuel and other products.

So, what caused the severe post-storm fuel outages, and what are solutions that can be effective - or may not be effective €" in the future? Here is an overview.

Fuel Supply Was Affected "Upstream"
The disruptions to the system began well "upstream" from the gas station. According to the U.S. Energy Information Administration (EIA), the East Coast area affected by Sandy uses about 2.2 million barrels per day of gasoline and distillates (home heating oil and diesel fuel). Overall, about 42% of this supply comes from area refineries, another 31% comes from other areas of the country via pipeline and 27% from imports, largely to the New York Harbor. And all of them saw significant disruptions.

  • Refineries: There are six refineries in the region and they account for 1.29 million barrels of refining capacity — about 7% of the nation's capacity. At the height of the storm, 94% of this capacity was affected either through shutting down completely or reduced runs. Two refineries in the New York area, which had a combined capacity of about 308,000 barrels per day, remained out of operation through November 13.
  • Pipelines: Pipeline shipments from the Gulf Coast were significantly affected by the storm. Both the Buckeye and Colonial (825,000 barrels per day) pipelines were down because of safety precautions and other supply-related issues. The product deliveries disrupted to the region via pipeline was even greater than the capacity of the two shutdown refineries.
  • Imports: Additionally, New York Harbor waterborne shipments of gas imports and other products were shut down or limited. Prior to Sandy, EIA reports that PADD 1 (roughly the East Coast) had been importing about 600,000 per day of product; the week after the storm, imports were just 217,000 barrels per day, the lowest since EIA had been tracking imports in 1994. Imports recovered a bit to 525,000 the following week.

Even as supply was being restored, terminal shutdowns because of flooding or lack of power prevented the product from moving any further. A total of 28 terminals were affected by Sandy, and half of then remained shut several days after the storm. As a result, inventories built on the Gulf Coast, and supplies continued to be extremely tight on the East Coast.

And there was one more element: thousands of roads were closed from West Virginia to New England because of downed power lines or tree limbs — 600 roads in Westchester County (New York) alone — hampering the ability of trucks to get to open terminals or deliver fuel, even if they were able to obtain it.

While overall demand for fuel decreased in the days following the storm, largely because of the massive power blackouts, demand remained steady for customers seeking fuel for generators or for their vehicles. Adding to the problem was that there were very few options for travel beyond driving: mass transit throughout the region was crippled, as New Jersey Transit, the Metro-North commuter line and the New York Subway all had limited operations because of flooding, power outages or storm damage.

The upstream issues and steady demand was magnified at gas stations, which faced power or fuel shortages. EIA reported that two-thirds of New York metro area stations were without fuel on November 2; two days after that, EIA estimated that 27% of stations in the New York area still did not have gas for sale. Virtually all branded marketers were on allocation, unbranded marketers experienced shortages and there was almost no supply for non-contracted customers at branded terminals.

Some Problems Were Addressed "Downstream"
There was no question that fuel outages were severe, but there were a number of steps that were taken to help mitigate problems.

Waivers on fuel specifications. Many of the areas in the affected region required that different blends of fuel be sold by retailers, making it difficult to easily obtain product from nearby regions. However, on October 31, the U.S. Environmental Protection Agency issued emergency waivers of the reformulated gas requirements for 10 states and Washington, D.C. This made it easier for fuel trucks to travel outside of the region to obtain product — often as far south as Virginia or as far west as Ohio. A similar waiver was issued of Ultra Low Sulfur Diesel fuel specifications in New Jersey.

Waivers on hours of operation. Truckers are limited to working 14 hours before they are required to take a rest. However, as waiting lines at crowded fuels terminals grew to be hours long, and trips to pull product from distant terminals compounded delivery runs, truckers were granted temporary waivers to work longer hours. On Oct. 29, the Federal Motor Carrier Safety Administration published a declaration exempting commercial vehicles carrying emergency-related materials to and in states affected by Hurricane Sandy.

Waiver of the Jones Act. Goods transported between U.S. ports must be carried by ships built in the U.S. and operated by U.S. crews, according to the Jones Act, passed by Congress in 1920. The Obama administration issued a temporary waiver of this requirement to help quickly bring more product the area.

Odd/even rationing. New Jersey implemented odd/even gas rationing on November 3 to seek to discourage drivers from topping off and panic buying. New York City introduced a similar program several days later.

Stores innovated. In most cases, when stores are out of power, they are out of business. However, many convenience stores stayed open at least in daylight hours, even if they didn't have power at the fuel island. And for those with power but without Internet connections, which disabled their card payment systems, they were still able to sell fuel to customers who paid by cash. Some stations with power also offered customers without power free electric charges for those with cell phone and similar devices

What About Mandating Generators at Stores?
Retailers who were affected by Hurricane Sandy wanted nothing more than to stay in business and have both power and fuel. After all, a store that has to close for a week sees 2% of its annual sales go away. With overall profit margins of around 1%, no retailer could afford to close down for an extended period of time.

But would generators have kept them in business? Probably not, given all of the other fuels- and power-related challenges upstream. Proposals to mandate generators at stores would not have helped with Sandy, given the widespread upstream problems. If power is out at the store, it is likely that the nearby upstream operations are also without power. No amount of power at the retail station would expedite the delivery of fuel if these systems are not operable.

The generators needed to power a convenience store selling fuel are much more complex than those sold off the shelf at home-improvement stores. The average site would need a back-up power system of 70 kW to 150 kW. Also, there can be extensive rewiring to make the store able to run off generators. Estimates vary on the cost of a commercial-grade generator, typically from $40,000 to $60,000, but some may cost much more. Add to that the cost of rewiring the store. Rewiring and installing transfer switches can cost upwards of $25,000 in an existing store.  By comparison, in 2011 (one of the best years on record), the average convenience store reported pre-tax earnings of about $45,000.  Even if a retailer were to make this hefty investment, it is unlikely that the system would be required more than once every few years.

Mandating transfer switches or generators does not address issues besides electricity at a station. Depending on the type of disaster, there could be other complications, such as damaged facilities, fuel supply shortages, fuel price volatility and ensuring that there are employees able to return to work in numbers sufficient enough to meet demand.

One option suggested is the law put in place in Florida, which requires key gas stations to be able to connect to generators within 24 hour of a major disaster. This seems to be less intrusive on retailers, but problems remain. Essentially, this would be asking the market to stockpile generators in case of need €" and someone would have to pay for it.

But the biggest concern remains the rest of the supply chain. Many retailers affected by Hurricane Sandy had power - including those with generators €" but were unable to sell fuel because there was no fuel in the distribution system.

Another option suggested is that fuel could be stockpiled in advance of a known natural disaster, so that the impact of upstream outages is mitigated. Unfortunately, this solution is impractical, because there isn't excess storage capacity in the system. Even if a retailer or terminal wanted to expand storage, they run into physical space constraints, permitting challenges and financing issues.

After an emergency, everyone looks for strategies to offset the problems encountered during the event and the recovery. All retailers (and others in the supply chain) evaluate their preparations and response plans to determine what they might do to better serve their customers. Some may decide that installing a generator is in their best interest. But mandating the costly installation of equipment that could be used as little as once every several years is bad policy and bad for the economy.

Unfortunately, there is no magic solution to returning the system to normal after an emergency — as we saw with Hurricane Sandy, it takes some time for all the pieces to come back online and supplies to start benefitting consumers.​