Drivers are at mercy of a few refineries

Panic buying, dwindling inventories and a pair of unpredictable storms all played a part in creating the gas shortages that tightened in Middle Tennessee over the past two weeks.

But as shocking as the short-term loss of gasoline was to the region, it could have been much worse, analysts said this week.

"We really did dodge a bullet," said Bruce Bullock, director of the Maguire Energy Institute at Southern Methodist University in Dallas. "If it had hit 15 or 20 miles down the coast, we could have had the refineries out for nine to 12 months."

Middle Tennessee, as well as most of the rest of the Southeast, is growing more dependent on just a handful of refineries stretching along the Gulf Coast to supply practically all of its gasoline, at the same time that producers are stockpiling less inventory, energy investors, oil analysts and professors said.

So much fuel is expected to flow seamlessly from the Gulf of Mexico to the pumps — and so few alternatives exist to move supply inland — that shortages are almost certain if any part of the supply chain breaks down as occurred this month, these people said.

As such, Hurricanes Gustav and Ike were a warning to the region, they said.

Both storms rated as Category 2 storms, the second-weakest classification for a full-blown hurricane, and they failed to cause the massive damage that many meteorologists had feared. Had either storm been bigger — or had either one not veered a bit at the last minute — this month's shortage could have lasted far longer.

Nashville remains vulnerable

Industry analysts say a number of factors made Middle Tennessee more prone to running low on fuel.

Much of the blame for this month's shortage was initially placed on panicky consumers. In the days before Hurricane Ike struck two weeks ago, rumors of a shortage began to circulate in East and Middle Tennessee, causing some people to stockpile fuel.

Sales of gasoline were four times their normal levels on the weekend that Hurricane Ike made landfall and twice normal levels in the week afterward, the Tennessee Emergency Management Agency and the Tennessee Oil Markets Association say.

A high concentration of independent operators, who have to buy their gasoline wholesale, also may have played a role in the shortage.

Stations affiliated with major chains often have long-term contracts that guarantee they will receive gas from refiners at a fixed price and time. Fearing supplies would run low as Hurricane Ike began to move ashore, refiners started holding back inventory for their long-term customers, causing wholesale prices to rise to as high as $4.87 a gallon.

Many independent stations, such as Mapco Express, apparently decided to simply wait for prices to come back down rather than pay amounts that would have meant certain losses, observers said.

"I can't imagine it's a positive thing (to not sell gasoline), but to the extent that wholesale prices were high, it may not be as bad," said Brian Shore, an energy analyst with Avondale Partners who follows Mapco.

Pipeline supplies region

As the shortage dragged on, attention has shifted to the two-dozen or so refineries on the Gulf Coast that process crude oil into the gasoline consumed in Middle Tennessee.

These refineries are connected to the region by the Colonial Pipeline, which originates in Houston and transports gas from the Gulf Coast to the eastern United States. A spur running from Atlanta and branching in Chattanooga supplies nearly 80 percent of Tennessee's gasoline.

The Colonial Pipeline escaped damage from hurricanes Gustav and Ike, but without gasoline from Gulf Coast refineries idled by power outages and other damage, the pipeline had little fuel to send.

The result was a situation that's almost unfathomable in other parts of the country, some observers said.

In the Midwest, for instance, most states have refineries within their own borders, letting them produce gasoline locally. The Northeast, meanwhile, can import gasoline through New York harbor, where it can be stored in massive tanks in New Jersey.

"New York/New Jersey can get supplies from Canada and Europe," said Antoine Halff, head of commodities research for Newedge Group, a New York brokerage. "The Southeast has depended almost entirely on those refineries. … There's a bottleneck."

Supply low before storm

Still, dependence on Gulf Coast refineries and a high concentration of independent operators may help explain why Middle Tennessee felt a shortage. But they don't explain why this pair of storms — as opposed to the countless hurricanes that preceded it — caused such a disruption.

To explain that, energy experts point to conditions on the coast. First of all, the storms came ashore in rapid succession, and both took out refinery capacity.

It was as if, instead of two minor storms that slowed production for two weeks, the Gulf Coast was hit by one massive storm that took production down for a month.

"If the storms hadn't been back to back, we wouldn't be having this conversation," said Ken Medlock, an energy fellow in the Baker Institute at Rice University in Houston.

The storms also came when inventories were low. With the price of crude oil more than $100 a barrel and demand for gasoline falling as the national economy slows, refiners had spent the summer selling the stocks they had rather than producing more fuel.

"They had no economic incentive to really push and produce more gasoline," said David Pursell, the managing director of Tudor, Pickering, Holt & Co., a Houston energy investment firm. "There's no reason to produce more if it's going to sit in a tank."

Hurricane Ike also hit in a particularly vulnerable spot. Although tropical systems strike the Texas and Louisiana coasts often, it has been 25 years since a major hurricane, Alicia, hit the area around Houston and Galveston.

In the years since then, that region has become even more important to the refining industry. With high barriers to building new refineries, producers have opted to expand existing facilities to meet rising demand rather than attempt to build new refineries elsewhere.

Meanwhile, the Southeast has grown substantially, with car-friendly cities such as Nashville, Atlanta and Charlotte burgeoning outward.

"At the same time you've had demand going up, you've been unable to build new capacity to keep up," said Bullock. "You've got a pretty large geographic area and quite a few metro areas, and refineries are probably as sparse as anywhere outside the Great Plains."

Facilities controversial

One way to keep from running out of fuel the next time hurricanes strike Gulf Coast refineries is to stockpile ahead of the storm season, much as Northeast utilities store up heating oil for the winter, some observers said.

But doing that would require an extensive network of storage tanks, and those facilities raise environmental and safety concerns. Nine years ago, for instance, Colonial Pipeline officials proposed a fuel storage and distribution complex south of Murfreesboro. That facility would have been connected to the main pipeline by a new spur running to northern Alabama.

But Rutherford County residents, as well as people living near the spur route, objected to the plan, pointing to a 1996 spill from the pipeline that cost $2.5 million as evidence the facility would be bad for the community. Colonial Pipeline withdrew the plan.

Building a storm inventory would also mean designating someone to manage the stockpile. A coalition of state governments could take on the job, energy analysts said, or they could use regulations to require the oil industry to set aside a portion of their production. Both methods would be costly, however.

"It boils down to having inventory," said Madlock. "This is going to pass, and it's unfortunate. But what it does is highlight how critical fuel supply really is."

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