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Was the gas shortage preventable?

November 5, 2012: 8:45 AM ET

The government dragged its feet to lift a regulation that kept tankers from heading to New York filled with gasoline. It needs a better plan for the next time.

By Cyrus Sanati

nyc-gas-linesFORTUNE -- A combination of bad policy and poor planning exacerbated fuel shortages in New York and New Jersey last week and over the weekend, creating yet another headache for residents impacted by Hurricane Sandy. With a lack of backup power at pipeline pumping stations and gasoline storage facilities, it has been difficult to deliver fuel to the hardest hit areas of the storm.

While New York Governor Andrew Cuomo said on Friday that the gas shortages should ease over the weekend, he has since changed his tune, saying on Sunday the problems will likely continue for an unspecified "number of days." As such, drivers in the region shouldn't expect a quick fix. Gas lines and rationing will continue as long as there remain kinks in the sensitive gasoline transport network.

Life seems to be getting back to normal for many residents a week after Hurricane Sandy disrupted the region. Most of Manhattan has power again and the subways and commuter train lines are nearly all restored. But the one stain in the relatively rapid recovery is the lack of gasoline throughout the region. Drivers in and around New York and New Jersey have to wait hours in gas lines that can stretch for miles. New Jersey recently instituted a bizarre even-odd license plate number filling system in an attempt to ration supply. Meanwhile, the federal government has authorized the military to rush 24 million gallons of gasoline to the region – 450,000 of which arrived this weekend. Despite all of this, gasoline continues to be in very short supply.

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So why is it so hard to get gasoline to New York? The logistics behind the transportation of a gallon of gasoline from the refinery to the gas pump is an extremely sensitive process. Basically, a gallon of gas is created at a refinery, and then processed, shipped, stored and trucked to your local gas station. If the process breaks down at any one of those stages then the entire operation grinds to a halt.

Hurricane Sandy severely disrupted the gasoline supply chain, creating a number of broken links, which will take time for it to fully mend. First, Sandy knocked two of the region's six refineries out of commission. The Phillips 66 Bayway refinery in New Jersey, the second-largest refinery on the East Coast, was flooded during the storm and is expected to be out of commission for a while. PSEG, the local utility, said during its earnings call Friday that it had restored power to the refinery, but that may be the least of the refinery's problems if the flooding fried sensitive equipment which could take weeks to repair. Meanwhile, Hess's (HES) Port Reading refinery had its power knocked out during the storm and just got it back on Saturday. Hess officials say it will be several days before the refinery can be restarted. The other refineries in the region are either running at reduced capacity or operating normally.

PBF Energy's Delaware's City refinery wasn't significantly impacted by the storm and stands ready to send gasoline up north – but how? That gets us to the next major problem in the gasoline chain: shipping. Sandy knocked out power to a number of critical pipelines that provide the bulk of the region's refined product needs. The lifeline of the East Coast is the Colonial pipeline system, a 5,500-mile network of refined product pipelines stretching from the nation's refining center in Houston up to New York Harbor.

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In order to move gasoline up the line you need a pumping station -- without it, the gasoline just sits in the pipe. Unfortunately, Colonial lost power to its pumps in Lynden, New Jersey during the storm, cutting off this vital gasoline artery, starting a chain reaction that caused supply to rapidly dry up all along the East Coast. The same thing happened to the Buckeye pipeline, which runs gasoline into New York from the Midwest. Colonial said on Friday that it finally got generators out to its pumping station in New Jersey and started the process of moving gasoline back into the area, but on a limited basis. It could days or even weeks before the pipeline is back up to full capacity. Meanwhile, PSEG said that it has restored power to the Buckeye pipeline and to its pumping stations in New Jersey.

While pipelines are usually the most reliable and cost-effective way of transporting gasoline, they aren't that great in an emergency. That's because there is just so much you can shove into a pipeline before it bursts. Additionally, gasoline moves at a rate of just three to eight miles per hour along the pipe, meaning a trip from Houston could take 14 to 22 days, a long time to wait for relief supplies -- especially if it is delayed by a lack of pumping power.

In addition to pipelines, gasoline can also be efficiently transported via the sea in a big gasoline tanker. Therefore, as an alternative, refineries with port access could theoretically circumvent the downed Colonial pipeline by shipping gasoline directly into New York Harbor. Unfortunately, government regulations kept that option off the table for days, exacerbating the fuel shortage.

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The regulation at issue, the Jones Act, prohibits the transfer of goods between U.S. ports unless the ship moving the cargo was 1) made in the U.S., 2) registered in the U.S., and 3) staffed by an all American crew. The economics of shipping gasoline under those restrictions makes the trip very expensive -- double the price of a foreign sailing. In any case, even if the economics worked out, there are very few U.S.-made gasoline tankers, let alone U.S.-made tankers with all American crews onboard. So that means gasoline supplies backing up in Houston, due to the Colonial shutdown, is currently being loaded onto ships bound not for New York, where it is needed, but for South America and Europe.

Governor Cuomo announced Friday morning that the Federal government had waived the Jones Act provision, allowing for the transfer of gasoline via any ship to New York. That was welcome news, but it shouldn't have taken a week for the government to get its act together. If ships filled with gasoline left Houston last Monday, the day Colonial suspended shipments to New York, then the gas would have been one week closer to the city, helping to alleviate the near-term supply crunch brought on by the power outage.

So with the temporary lifting of the Jones Act, the gasoline problem is solved, right? Well, not totally. Even with the transportation issue somewhat resolved, there is still a problem with the next link in the gasoline supply chain: storage and distribution. The storm knocked out power and damaged to a number of gasoline storage and loading terminals around the New York Area. Without these terminals, pipelines can't offload gasoline into the storage drums, which is needed to feed gasoline trucks bound for nearby service stations.

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The damage to these facilities appears to be serious, according to clean product traders familiar with the situation. Motiva, a joint venture with Shell and Aramco, said that its storage facilities in Sewaren and Newark, New Jersey, and Brooklyn and Long Island, New York, are down with no restart date known. The damage could be serious as Motiva admitted that one of its tanks leaked 336,000 gallons of diesel fuel.  Even more troubling, IMTT's mega 600-acre storage facility in Bayonne, NJ, which is partly owned by Macquarie, the Australian investment bank, took a major hit in the storm. The facility resumed operations this weekend at a limited capacity. The company is still surveying the damage but it could take weeks for the facility to get back to normal operations. Meanwhile, Kinder Morgan (KMI) says one of its massive storage tanks blew into another tank in its facility near Staten Island in Carteret, NJ, creating a crack in one of the tanks. Nonetheless, Kinder Morgan says it hopes to have its facility up and running soon.

Eventually, all the damage caused by Hurricane Sandy will be repaired. The storm knocked out power to a number of gasoline stations with full tanks, so bringing those stations online will be a big help in the short term. The government has finally stepped up and waived the Jones Act, but more needs to be done to power up terminals or else New York Harbor will just have a bunch of gasoline-filled ships roaming around with nowhere to dock. This is the second hurricane to hit New York in the last two years, so this may not be such a "freak" occurrence amid changing weather patterns. Both government and business should therefore do a better job of dealing with this issue come next year.

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