The Fuse

Refinery Explosion Exposes Northeast Energy Vulnerability

by Alex Adams | @alexjhadams | June 26, 2019

On June 21, an explosion and subsequent fire at the Philadelphia Energy Solutions (PES) refinery destroyed the alkylation unit of the plant, a piece of equipment vital for the production of gasoline. Since a large section of one of the country’s largest refineries is expected to remain offline for months, wholesale gasoline prices, on the eve of the July 4 holiday season, rose and an uncomfortable spotlight was shone on the vulnerability of American refining capacity in the Northeast.

Although a statement by PES says the refinery is currently running at a reduced rate, the explosion and fire could cut the refinery’s output by as much as 4.2 million gallons per day, enough to meet about 2.7 percent of East Coast demand. Given the extent of the damage, questions over the ability of the company to finance the rebuilding, and strong local opposition to the refinery operating so close to Philadelphia’s downtown, speculation has grown over the refinery’s future.

The incident places upward pressure on prices at an inopportune time. Gasoline prices jumped 3.9 percent on news of the explosion and it creates a supply outage two weeks before the July 4 holiday, a large increase in summer driving. Since the refining facility as a whole—which consists of two refineries, Girard Point and Point Breeze—represents the largest refining complex on the Eastern seaboard, an extended outage is likely to result in a prolonged period of higher prices, particularly through the rest of the summer. “Commuters & vacationers that live in the Northeast… will face high gasoline costs,” Joe Brusuelas, chief economist at RSM US LLP, said on Twitter.

While existing supplies destined for other markets can be diverted to regions that are expected to be affected by the outage—notably Pennsylvania, New York state and New Jersey— “there’s certainly going to be price increases from an initial shortfall,” analyst Andy Lipow told Bloomberg. Lipow added that tankers from Europe can also arrive in 11 days.

Yet the fact that tankers arriving from Europe to meet gasoline demand forms part of the American energy discussion highlights the vulnerability of America’s Northeast refineries. Due to restrictions placed on foreign vessels operating between to U.S. ports under the Jones Act—which requires ships traveling from one American port to another to be U.S.-made, staffed, and owned—crude oil that costs $2 to ship from the Gulf of Mexico across the Atlantic to Europe, costs $5 or $6 to ship to the Northeast.

In a 2014 blog post from the American Fuel and Petrochemical Manufacturers (AFPM), the trade association for the U.S. refinery industry, then-AFPM President Charlie Drevna noted, “This $3 per barrel difference equates to a 7-cent-per-gallon product price difference—more than enough for foreign refiners to process that crude and sell the gasoline back to the Northeast U.S. for less than the cost our refiners would incur.”

PBF Energy Inc. Executive Chairman Tom O’Malley echoed this sentiment in 2014, as debate grew over the removal of the U.S. crude oil export ban. “For heaven’s sake, if we’re going to take the crude and export it all around the world, please let us export it to the U.S. East Coast,” Reuters reported him as saying on an earnings call, “We cannot do that if you can export crude oil to Europe at a cost of $2 a barrel and we have to use a Jones Act ship which cost us $6 or $7 a barrel.”

Threatened by potential shutdowns as recently as 2012, the influx of new shale oil—particularly from the Bakken—has helped keep the Northeast refineries in business. This latest fire throws a spotlight on the fragility of the infrastructure which provides fuels for a significant portion of the nation, and the precarious nature it continues to find itself in.