When a hurricane strikes the Gulf Coast, oil prices often skyrocket. But regional transportation networks can help and cushion the impact on prices, suggests research by Chicago Booth’s John R. Birge, University of Toronto’s Timothy C. Y. Chan, Wilfrid Laurier University’s Michael Pavlin, and University of Toronto PhD candidate Ian Yihang Zhu.
Their finding has implications for the commodities industry, but also for the many people and companies affected by recent and ongoing supply-chain disruptions.
The researchers focused on the Colonial Pipeline, which connects Gulf Coast refineries to the Port of New York and New Jersey. In 2016, it experienced a massive leak followed by an explosion, then shutdowns caused by hurricanes in 2017, and most recently a ransomware attack in 2021. These events interrupted the supply of oil, gasoline, and jet fuel from Gulf refineries to the east coast of the United States.
The researchers developed a model to map the relationship between gasoline prices and regional transportation structures. They also created a methodology to estimate the strength of different transportation networks on the basis of price data. They then applied the methodology to real-life case studies of the Colonial Pipeline.
In the US oil and gas industry in particular, there is often a focus on pipeline distribution, Birge says. However, “the gasoline distribution network is much more complex than the limited number of direct pipelines,” he adds. Other transportation modes such as ship, rail, and truck may not be as obvious, he says, “but their relative availability in terms of linking markets can produce large differences.”
Take the problems the pipeline had in 2016. Line 1 of the Colonial Pipeline experienced a leak in Shelby County, Alabama, on September 9, forcing a partial shutdown until September 21. Then on October 31, a deadly explosion in Shelby County caused another partial shutdown until November 8.
Locations immediately downstream from the disruption site—in particular, Atlanta and Nashville, Tennessee—predictably experienced the most significant price increases following the initial pipeline leak, the researchers find. This was especially the case in Nashville, where there were no alternative modes of gas and oil transport. The finding is consistent with the researchers’ expectation that, when there is a disruption affecting a single link in the gas transportation structure, the locations most directly downstream will experience the highest price surges. The magnitude of price jumps in other locations depended on the availability of alternative transportation resources, the researchers find.
While it might seem obvious that gas prices in Atlanta and Nashville would be most affected by such a disruption, it may not be as readily apparent that Columbia, South Carolina, which is further from the terminals on the Gulf of Mexico, would experience far less of a price shock. Yet that is what happened.
“It suggests that Columbia has additional resources for the other transportation modes that Nashville and Atlanta lack,” Birge explains.
Indeed, the researchers find that cities downstream from Greensboro, North Carolina, experienced far less of a price surge because of the availability of other transportation resources, including another pipeline.
A second case study analyzed the 2017 hurricane season in the US southeast, which included two catastrophic hurricanes. Harvey hit Texas and Louisiana in August, and Irma roared up from the Caribbean to blast Florida in September. The storms caused nearly $200 billion in damage to the region and resulted in refinery closures, tanker dockings, and a weeklong total shutdown of the Colonial Pipeline.
While the price of gas increased in Florida, probably due to reduced port and tanker operations immediately after the hurricanes, the rise was much smaller than in the inland cities, the researchers find. “This is likely a result of the flexibility of tankers and marine transport, where capacity can ramp up quickly and deliveries from other coastal ports can be accommodated,” the researchers write.
Consider Miami, Birge says. While the city has no pipeline connection to the Gulf and is subject to hurricanes, “we find that it does not experience significant price disruptions even during severe weather events, apparently due to high capacity for other transportation modes, probably mostly through its port.”
Understanding these effects could help policy makers assess the benefits of bringing on new transportation infrastructure or trading routes, the researchers write. It could also enable them to estimate the value of expanding inventory reserves, which can act as a temporary buffer after catastrophic events.
John R. Birge, Timothy C. Y. Chan, Michael Pavlin, and Yihang Zhu, “Spatial Price Integration in Commodity Markets with Capacitated Transportation Networks,” Operations Research, March 2022.
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