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The Colonial Pipeline Outage: Here's What You Need to Know

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The five-day closing of Colonial Pipeline — a crucial piece of infrastructure that transports gasoline to the Southeast and East Coast — has reduced the fuel’s supply and raised prices at the pump in several U.S. regions during the past few days. While the system’s operator has initiated operations, the incident has disrupted American energy supplies and impacted millions of people.

So, here’s a rundown of everything that happened.  

Colonial Pipeline: The Biggest Fuel Conduit in the U.S.

Colonial Pipeline carries around 2.6 million barrels of gasoline, diesel, jet fuel and other products each day from the Texas Gulf Coast refining hub to the New York metropolitan area. It has two primary shipping lines, Line 1 (for gasoline) and Line 2 (for other fuels).  

In particular, the 5,500-mile system transports almost half of all fuel consumed on the East Coast. It serves most of the Southern states, some 26 oil refineries and several major airports. The pipeline is managed by Colonial Pipeline Co. – owned by oil biggie Royal Dutch Shell (RDS.A - Free Report) , privately held corporation Koch Industries and a consortium of foreign and domestic investment firms. 

What Happened

On Friday, the pipeline was crippled following a cyberattack by hackers who took control of the computer systems and demanded a ransom to release them. The breach, which also affected some of its information technology systems, forced Colonial Pipeline, the Alpharetta, GA-based private company, to temporarily stop all operations. With the help of cybersecurity agencies, the operator is investigating the extent of the attack, while apprising law enforcement and federal agencies.

Impact on Supplies and Consumer Prices

The disruption has led to long lines at the pump, driven up prices and left thousands of service stations along the U.S. East Coast without fuel to sell. As North America’s biggest fuel pipeline’s shutdown dragged on, panic buying has worsened the supply situation and increased gas prices in several Southeast states. According to the American Automobile Association (“AAA”), average national prices at the pump have climbed 8 cents from the previous week to above $3 a gallon — the highest in almost seven years.

With the transportation of aviation fuel also suspended, the likes of American Airlines Group (AAL - Free Report) had to put additional stops to a few of its long-haul routes out of Charlotte, NC. Meanwhile, some carriers like Southwest Airlines and United Airlines were being forced to take extra fuel on flights.

Fears of Inflation

The supply shock comes at a time the country’s energy industry is starting to rebound sharply on vaccine progress and the ongoing macroeconomic recovery. Moreover, with the peak summer driving season approaching, demand was expected to be strong with Americans again taking to the streets following a year of curbs. A prolonged outage could also flare up inflation by pushing retail prices up when oil is already on the move higher. 

Alternate Supply Arrangements

The sudden interruption left traders and crude retailers scrambling to get supplies via sea or other alternatives to send fuel to the East Coast. Some emergency barrels of gasoline and diesel are already on their way from Texas to the southeastern cities via truck. Moreover, with refiners including Valero Energy (VLO - Free Report) desperately looking for space to store the excess barrels they would normally put into the Colonial, oil tanker charter rates surged. Meanwhile, Gulf Coast refiners like TOTAL SE — carrying a Zacks Rank #2 (Buy) —reduced processing rates in response to the supply artery’s extended shutdown.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Government Action

The White House established an interagency task force to address the attack, while easing a raft of safety and environmental guidelines to facilitate the transportation of fuel by truck, ship or even rail to tackle shortages at big cities and airports. At the same time, Washington officials sought to calm the public that there is nothing to cause alarm. If the Colonial Pipeline restart was delayed further, the government had the option to waive an obscure maritime law called the Jones Act, which would allow overseas tankers to ferry petroleum products between U.S. ports.

Winners & Losers

Industry observers believe that PBF Energy (PBF - Free Report) , a refiner with a large footprint in the Northeast, could benefit from the Colonial Pipeline downtime. They also see windfall gains for energy infrastructure provider Kinder Morgan (KMI - Free Report) as it strives to carry additional volumes through its pipeline systems. On the other hand, downstream biggie Marathon Petroleum (MPC - Free Report) could lose millions in revenues as it is temporarily unable to send its products through Colonial. 

Service Restoration Update

Down since late Friday, the Colonial Pipeline operator, which manually resumed operations on a segment (from North Carolina to Maryland) on Monday, was hopeful of reaching its “goal of substantially restoring operational service by the end of the week”. Per the latest updates, the conduit returned to service Wednesday evening.

Wrap-Up

It remains unclear as to when this major fuel artery will be fully back online from the ransomware attack. But what is clear is that despite being the safest and most cost-efficient delivery network to transport petroleum products around the country, pipelines are highly vulnerable to sophisticated intrusions that could play havoc with the nation’s energy security.

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