By Jeffrey Winters, Associate Editor
One of the most underreported stories of the year was the gasoline shortage that hit the southeastern United States in September and October. The scenes that played out in metropolitan Atlanta and Nashville were like something from the 1970s, with gas stations running dry, cars lined up for hours at the stations that still had fuel, and politicians talking about such Band-Aid remedies as gasoline rationing based on license plate numbers.
Given the central role that gasoline plays in the American economy, you’d think something like that would have been the big news. But the irony was that while motorists in the Southeast were queuing up for fuel, prices for gas were coming down in the rest of the nation, and the spot price for oil was falling more than 40 percent from its peak earlier this year.
The proximate cause for the disparity in fuel availability was Hurricanes Gustav and Ike, which tore into the offshore oil-producing areas of the Gulf of Mexico, necessitating a full evacuation from production platforms. More importantly, however, the two storms struck at the largest concentration of oil refineries in the country—facilities that a large chunk of the U.S. depends on.
This isn’t the first time that a major hurricane has struck the Gulf Coast, of course, and Hurricanes Katrina and Rita seriously affected petroleum operations there. But when Alicia slammed into Houston in 1983 and shut down some refineries for a week, there was scarcely a ripple in gas prices.
The reason for that may have to do with moves toward making the industry more efficient and profitable.
Since the 1980s, the number of oil refineries in the U.S. has dropped steadily. Some states, such as Florida and Oregon, have seen every refinery shuttered, while others, such as Nevada, have seen operations scaled back dramatically. Some of these closures were a natural outcome for an industry that was struggling with actual drops in oil consumption just 20 years ago.
But another, perhaps more important, factor, is consolidation. Although there are fewer refineries than there were two decades ago, the remaining ones produce more gasoline and other petroleum products. The plants have not only seen increased capacity, thanks to expansion and better technology, but refineries now operate closer to capacity than they did before. Both these factors have led to better profitability for refineries, even when margins have been squeezed—thanks to consumer resistance to higher fuel prices—more than ever before.
WEEKLY GASOLINE PRODUCTION NON-IDLE REFINERY CAPACITY
Such moves toward efficiency and profitability, however, have hidden costs. For one, as refineries have closed, the remaining ones have tended to be clustered. Under normal circumstances, putting more than 40 percent of the nation’s refining capacity in Texas and Louisiana might be advantageous, since a concentrated industry can take advantage of economies of scale. But an industry with such tightly clustered production is much more susceptible to natural—or man-made—disasters.
The greater utilization of capacity also has an unexpected downside. With refineries running closer to flat out than they ever have before, the refinery network is quite brittle. Whereas in the past the loss of several percent of the nation’s refining capacity could be made up by remaining facilities—as was done after Alicia in 1983—today that potential no longer exists. Remove a dozen refineries for a couple of weeks and some for a month, and the result is gasoline shortages.
Can anything be done to add resilience to the gasoline production infrastructure? When the electrical grid strains to provide enough power—or even breaks under that strain—the solution is usually to add more generating capacity and find the flexibility to shed peak demand periods. The equivalent for the motor fuel supply chain would be to build new refineries, or import even more finished petroleum products (on top of the million barrels a day we already import). Importing more fuel simply swaps one time of vulnerability for another.
So while it might go against the grain of some two decades of consolidation, adding refineries and expanding capacity beyond normal operations may be what is needed to keep gasoline shortages from becoming an annual hurricane season occurrence.