When Mother Nature Strikes

Convenience stores do much more than sell daily essentials and an estimated 80% of the fuels purchased in the United States — they also play a critical role before and after a natural disaster like a hurricane strikes.

May 1, 2017  read

Most of the 154,500-plus convenience stores in the United States are 24/7 operations, offering much-needed food and refreshment for millions of Americans. Convenience stores also sell an estimated 80% of the fuels purchased in the United States, and these 123,00-plus convenience stores that sell fuel play a critical role before and after a natural disaster like a hurricane strikes.

When most community members are evacuating to safety, convenience stores typically remain in operation as long as they can without putting their own employees’ safety and wellbeing in harm’s way. Their focus is to see how can they stay in business as long as possible before the storm, and how can they be the first to open when it is safe to do so — all while ensuring that they have power and supply. This means making sure fuel, food and other necessities are available for emergency workers and customers seeking a return to normalcy.

There are added complications with staying open that go far beyond opening the doors. For one, if a store doesn’t have power, it’s not able to open. But even with power restored or from emergency generators, there are a number of other critical elements that need to be addressed. And the biggest is usually how to get new fuel shipments.

Retailers must depend upon a smooth distribution process upstream, from clear, debris-free roads for fuel tankers delivering product to adequate power to sustain operations at terminals, pipelines, refineries and even ports where crude oil is delivered.

And at times of strong, continuous demand, an average-sized fuels retailer will sell around 1,000 gallons of fuel an hour from underground storage tanks that usually hold 10,000 gallons. That means that even when a store has power and the distribution system has minimal disruptions, a retailer still may only have a few hours to get a new shipment and stay in business.

And, that fuel may be hundreds of miles from the station because the United States has a regional imbalance between where fuel is produced and where fuel demand is the highest.

Gulf Coast/East Coast Relationship
Fuels distribution in the United States is defined by five Petroleum Administration for Defense Districts, known as PADDs. PADD 1, which represents 17 East Coast states from Maine to Florida, has the largest fuel demand in the country. Meanwhile, PADD 3, which represents six largely Gulf Coast states from Alabama to New Mexico, has the largest supply of fuel in the country. No matter whether a hurricane hits the East Coast or Gulf Coast, a high percentage of fuel retailers — and their customers — can be affected.

Residents of the East Coast’s PADD 1 consume more than half of the gasoline in the country, but PADD 1 refineries supply less than 10% of the gasoline refined in the country. Meanwhile, PADD 3 produces has more than 50% of the country’s refining capacity and exports approximately two-thirds of its finished product to PADD 1. One more important point: PADD 1 is home to 44,381 convenience stores selling gas (35.8% of all U.S. stores) and PADD3 is home to 22,359 stores (20.5% of all U.S. stores). The U.S. Energy Information Administration developed a primer examining the two PADDs.   

When a major storm hits the Gulf Coast, in addition to potentially disrupting crude oil production, import delivery and refinery operations, it can take pipelines offline for a period of time. First, there is the temporary shutdown during the storm itself and the resulting loss of power to the pumping stations. Second, pipelines must remain full to prevent the mixing of products. Without refinery production keeping supplies steady, pipelines must slow down deliveries, creating temporary shortages at terminals along their delivery route.

Even when there’s not a major storm at play, the Gulf Coast and East Coast are highly dependent on each other to balance supply and consumption of transportation fuels.

The U.S. Energy Information Administration developed an excellent resource examining the two PADDS, “PADDs 1 and 3 Transportation Fuels Markets”, and the Fuels Institute published a broad overview about the overall distribution system, “Assessment of the U.S. Fuel Distribution System.”

Pipeline infrastructure linking the two PADDs and international trade play key roles in balancing the mismatch between supply and use of transportation fuels within each region.

Moving product from the Gulf Coast throughout the East Coast relies on the Colonial Pipeline, which supplies much of the gasoline and diesel fuel used on the Eastern Seaboard. When there are problems with the pipeline, the entire region can be affected. The Colonial Pipeline is a 5,500-mile system of pipelines that connects 29 refineries and 267 distribution terminals from Houston, Texas, to New York Harbor in Linden, New Jersey. With total U.S. fuel demand at around 19.7 million barrels per day, the Colonial Pipeline transports 13% of all fuel used in the United States each day.

When a major storm hits the Gulf Coast and/or the East Coast, it can disrupt the entire process, from tankards importing crude to refineries, to pipelines and retail fuel pumps, compromising the transportation energy infrastructure and leaving the most populated region in the United States in a very difficult situation.

When Hurricanes Hit
The Atlantic hurricane season begins June 1 and ends November 30, while the Eastern Pacific Ocean hurricane season begins May 15 and ends November 30, per the National Weather Service.

Convenience stores located in hurricane-prone areas plan to ensure in-store merchandise is available, such as milk, water and batteries. The days leading up to storms also translate to increased volume at the fuel island. But what happens when a storm hits? How do convenience stores obtain fuel supply, and what happens when sites run out? First, we need to understand the U.S. energy infrastructure.

Irene and Sandy
Hurricanes, Hurricanes Irene (August 2011) and Sandy (October 2012), took their toll in the Northeast due to flooding, high winds and widespread power outages. These storms also provide a good example of how U.S. petroleum supply networks can be completely disrupted when a storm hits. The following is excerpted from a 2013 U.S. Department of Energy report1:

  1. The Terminal
    Both hurricanes disrupted activity in the New York Harbor terminals, a major distribution hub in Linden, New Jersey, for petroleum delivery to consumer markets in New York, New Jersey, Pennsylvania and New England. The New York Harbor area terminals have a combined storage capacity of about 70 million barrels and receive product via pipeline from refineries on the U.S. Gulf Coast, the Philadelphia area, and two refineries located in northern New Jersey. The terminals also receive product via tanker and barge.
  2. The Refinery
    Hurricane Irene shut one refinery and caused reductions at five others in the Northeast, while Hurricane Sandy shut two refineries and caused reductions at four others. The Phillips 66 Bayway refinery in Linden, New Jersey, the second largest refinery in the Northeast, was shut prior to both storms. Following Hurricane Sandy, the Bayway refinery remained offline for several weeks for repairs and maintenance.
  3. The Pipeline
    Power outages and flooding forced pipelines supplying the Northeast to shut segments or operate at reduced capacity. Irene shut segments of three petroleum product pipelines and one crude oil pipeline, while Sandy shut segments of three product pipelines: Buckeye, Plantation and Colonial. The Colonial Pipeline — a major interstate pipeline that supplies the East Coast with petroleum products from refineries on the U.S. Gulf Coast — experienced flooding and loss at its Linden, New Jersey, facility during Hurricane Sandy. Colonial shut down the segment of its mainline system that serves markets in Philadelphia, New Jersey and the New York Harbor. Portable generators were brought in to power the Linden facility and restore normal flows on the line following an outage of about 5 days.
  4. The Retailer
    With power outages and disruption taking place within the petroleum supply chain, Hurricane Sandy caused widespread fuel outages at retail fueling stations in the New York City metropolitan area. EIA conducted an emergency survey to monitor the vehicle fuel supply conditions in the New York City metro area from November 2 to November 9, 2012. The survey found that a large portion of the retail fueling stations could not operate — due to a lack of fuel or loss of power — over the survey timeframe. On November 2, one-third of the gas stations EIA sampled were operational (assuming the stations that could not be contacted were not operational). On November 9, the share of gas stations operating had risen to 72%. No widespread shortages were reported at retail fuel stations in the aftermath of Hurricane Irene.

The Energy Department report concluded that retail gasoline prices were not significantly affected by Hurricanes Irene or Sandy. Retail prices experienced modest increases in response to increases in spot prices but remained relatively stable in the aftermath of each storm.

Retail Price Response to Fuel Disruptions
Following a natural disaster such as a hurricane, significant attention turns to the retail price of gasoline and diesel. Supply outages, or even potential outages, can result in changes in the wholesale price of fuel that is quickly reflected at the local fuel retailer. This is often incorrectly interpreted as the retailer seeking to profit — or “price gouge” — from the situation.

Retailers have very little control over the prices they post at their locations. According to the Oil Price Information Service (OPIS), the retail markup (the difference between the wholesale cost of the fuel and the retail price charged) over the past five years has averaged 20.0 cents per gallon, or 7.0% of the cost of a gallon of gas. After factoring in the costs associated with selling fuel, the average pre-tax profit per gallon for a retailer is approximately 5 cents.

When disruptions occur, fuel retailers, who often receive multiple shipments each day, are susceptible to changes in product availability and volatile wholesale prices. During disasters, retailers receive frequent updates from their suppliers alerting them to changes in wholesale prices and limitations on fuel supplies in their regions. Retailers selling branded fuel may incur price increases and be limited in their access to fuel. Retailers selling unbranded fuel, however, experience the most dramatic price increases and could be denied access to volume because the refiners focus on satisfying their contractual obligations first. In either case, retail prices react.

In addition to disruptions in the production and distribution of refined product to retail, along with the associated changes in costs and prices, another major challenge in the aftermath of a storm is the lack of power, which is required to operate retail fuel pumps. Even if retailers have fuel, they may not have electricity to operate their stores.

Once power is restored, many expect the system to immediately return to “business as usual,” but retailers may not have enough fuel inventory to satisfy consumer demand. In the run-up to a storm, many consumers change their fuel purchasing behavior and top off their tanks in preparation. Some retailers have reported as much as a 400% increase in fuel sales in the days leading up to an anticipated storm. This depletes inventories at local convenience stores and gas stations, and causes delays in resupply efforts, prolonging the disruptions that contribute to fuel outages.

Experience Helps Explain Market Behavior
While it is impossible to predict what could happen to market conditions and retail prices in the event of a future hurricane, evaluating the experiences from past supply disruptions is instructive.

For example, after Hurricane Katrina made landfall on August 29, 2005, Gulf Coast oil production was down more than 88% and 10% of the nation’s refining infrastructure was offline. The major pipelines originating in the area (Colonial and Plantation) were inoperable until early September, and then only at partial capacity. Owners of wholesale terminal and storage facilities did not know when they would receive additional supplies. As a result of limited supplies and continued demand, wholesale prices increased.

When Hurricane Rita struck the Gulf Coast on September 23, 2005, operations were still interrupted due to Katrina, with about 5% of refining capacity remaining offline. The one-two punch from Hurricanes Katrina and Rita shut down another 10% of the region’s refining capacity. The market was protected somewhat by higher-than-average product inventories in storage, which provided some time for the refineries to come back online. Still, that week’s wholesale prices nationwide jumped 9.5% and retail prices followed at 4.5%.

Hurricane Katrina is the third-most intense U.S. hurricane based on atmospheric pressure at landfall, according to Weather.com, which rated the 1935 Labor Day hurricane in the Florida Keys as the most intense hurricane on record. The small hurricane underwent an astounding strengthening period from a Category 1 to a Category 5 as it moved from Andros Island in the Bahamas to the Florida Keys. Maximum sustained winds at landfall were estimated to be 185 mph, and storm surge reached 20 feet.

1 Comparing the Impacts of Northeast Hurricanes on Energy Infrastructure; Office of Electricity Delivery and Energy Reliability, U.S. Department of Energy. April 2013.