The Colonial Pipeline Hack Is A Problem Not A Crisis

An old economists’ joke goes, “If my neighbor loses his/her job, it’s a recession. If I lose my job, it’s a Depression.” My corollary would be, “If my neighbor can’t get gas, it’s a disruption. If I can’t get gas, it’s a crisis.” Reports of gasoline stations on the East Coast running dry because of the hacking of the Colonial Pipeline system certainly suggest we’re getting close to tipping into the crisis stage, as least from the point of view of consumers. Panic buying is nothing new (think toilet paper) and cannot be deterred, and the timing of the interruption is bad, coming just before the summer driving season. But the government should be measured in its response, especially when it comes to new legislation.

Already, there are complaints about the reliance on one piece of infrastructure for so much (45%) of East Coast oil product deliveries and there will no doubt be calls for a) localized strategic petroleum product reserves, b) diversification of delivery capacity, c) new cybersecurity regulations for pipelines, and d) refinery construction on the East Coast. It reminds me of the time a Massachusetts Congressman called for a national energy policy, citing as a rationale the February 1978 Boston blizzard which prevented heating oil deliveries in his district. (Perhaps he thought the Department of Energy should maintain an SSR, Strategic Snowplow Reserve.)

Many have noted the tendency of politicians to take advantage of crises to enact policies, often ignoring issues until the wolf is not just at the door in the house and having dessert. The late Vito Stagliano wrote a book “Policy of Discontent” describing just this problem with respect to energy policy, and one can hope the pipeline service will be restored quickly enough to avoid that occurring now, because I have little confidence that Washington will deliver sensible regulations. The doctors always say, “First, do no harm,” to which should be added, “Don’t just do something, stand there.”

It is true that the pipeline infrastructure is vulnerable (along with many other parts of the American economy), but I have serious doubts that the Biden Administration will push for a boom in pipeline construction to address this. But few are probably aware that the U.S. created the Northeast Home Heating Oil Reserve in 2000, holding a million barrels of ultra low sulfur diesel fuel, to cope with potential regional shortages of that crucial fuel. This was largely in response to two specific stimuli: weather related disruptions of deliveries of fuel (such as the freezing of the Connecticut River, if memory serves), but also the outsized importance of Northeast voters, specifically New Hampshire presidential primary voters. To my knowledge, the reserve has never been used.

(Indeed, it’s ancient history now, but during the Iranian Oil Crisis in 1979, when President Jimmy Carter was facing a primary challenge from Ted Kennedy, he ordered the oil industry to build its heating oil inventories prior to winter to historically high levels, at the same time he was encouraging foreign nations not to engage in panic spot buying. The current situation, which is likely to be of days’ rather than months’ duration, should not see such a drastic move, but other, less costly steps, might be taken.)

Rough guess, the cost of the Northeast Reserve is on the order of $10 million per year or more, which is hardly enormous but arguably wasteful. Adding gasoline to the Reserve would probably cost at least $10 million per year per million barrels, and as much as twice that. (The East Coast—mostly New England—uses about 70 million barrels of heating oil a year, and about one billion barrels of gasoline, so presumably any Strategic Gasoline Reserve would be much larger than one million barrels.) Political opposition to such a move would probably be minimal and mostly partisan, whereas any effort to build a new refinery on, say, Martha’s Vineyard, would certainly create a political uproar.

This is not to argue that nothing whatsoever should be done, but rather to suggest Congress ‘measure twice, cut once’ instead of leaping to gather headlines and photo ops. The oil delivery system has a number of redundancies that will minimize the impact of the shutdown in duration and extent, so that in two weeks, prices will almost certainly return to normal. The public’s panic buying makes the situation worse, but can hardly be controlled: Congressional panic rule-making hopefully will be easier to deter. Repealing the Jones Act to make it easier to transfer oil between U.S. ports would be a help (and economically valuable) but I don’t expect Congress or the Administration to go up against the seamen’s union. Spending money on product storage will undoubtedly be easier (and allow for many photo ops at scattered storage locations).