Why Canada’s gasoline prices are affected by hurricanes in the U.S. Gulf

Aug 30, 2017   | Categories: Energy, Environment, Fuels, Refineries
Hurricane Harvey has dealt a devastating blow to the Texas coast and now, as a tropical storm, has its sights set on Louisiana. The citizens of Houston and surrounding areas are dealing with unprecedented rainfall causing extensive flooding that covers homes and threaten lives. The devastation and personal loss is heart-breaking.   

While in no way remotely comparable to the devastating impacts along the Texas coast, the ripple effects of Harvey are now being felt in Canada, as fuel markets respond to refinery shutdowns along the Texas and Louisiana coasts. Tightening gasoline supply is pushing up pump prices throughout the integrated North American market.   

The U.S. Gulf Coast is home to nearly half of North American refining capacity. “The Gulf coast is the primary supply point for refined products throughout the Eastern U.S., including areas that are logistically connected to Canadian refined product markets” says Jason Parent, Vice-President, consulting of Kent Group Ltd.

Leading up to hurricane Harvey’s landfall, as citizens took actions to stay safe and protect property, petroleum refineries in the area were also at work shutting-down or curtailing refining operations to ensure safety in the days ahead. As the flooding situation worsened, more shutdowns occurred along the Texas and Louisiana coasts. Today, more than 4 million barrels per day of production, or nearly 25 percent of North American refining capacity, is shut down. When you remove the equivalent of that much supply from any product market, it has an impact.

For perspective, when Exxon Mobil shut its refining operations in Baytown Texas in advance of the storm, 560,000 barrels per day (b/d) of product was taken off-line. This is more than Alberta’s total refining capacity. 

The Canada/U.S. energy link

To understand why a storm in the U.S. Gulf Coast can impact someone at a gas pump in Montreal or Toronto, it’s important to understand the logistical flow of refined products between the countries in an open market. 

The integrated nature of the North American fuel market is complex. Pipeline, rail, truck and marine vessels carry refined products across borders to distribution channels that supply communities across the continent. 

The trade flow further emphasizes the energy link. From January 2017 to May 2017, the U.S. exported roughly 500,000 b/d of refined petroleum products to Canada, including transportation fuels. In 2016, Canada imported 21.6 million barrels of gasoline alone from the U.S. 

Further connecting specific regions, the Canadian energy industry operates within two dominant orbits: east and west. In the Eastern supply orbit, there is more movement of refined products north and south between Canada and the U.S., so the market impacts of Gulf Coast supply disruptions are usually greater than in western Canada.

This market integration is reason that a drop in supply in one area can have an upward impact on wholesale prices, and eventually on the price at the pump some 2,500 kilometers away – and across the border.

PADDs, pipelines and product flow

“The Gulf region (PADD 3) is the primary supplier of refined products to the Eastern U.S. (PADD 1) through the Colonial pipeline” says Parent. The Colonial pipeline is also the largest refined product pipeline in North America, moving more than 3 million barrels of gasoline, diesel and jet fuel between the Gulf Coast and New York.

A sustained disruption of supply to the Colonial Pipeline can cause widespread supply shortages throughout the eastern part of the U.S. and directly impact wholesale and pump prices in both countries. 

Outside of the refining facilities themselves, any disruption to the supply distribution infrastructure can also play a role. 

“The magnitude of the effect on supply and prices depends primarily on the severity and duration of a storm’s impact on refineries and pipelines” says Parent. “There is the immediate market impact of closure and reduced supply, and the longer-term impact of cleaning up, assessing damage, and getting systems back on-line. All of these things will take time, and in the meantime – affect the market and pump prices.” 

This isn’t the first time that Canadians feel a pinch at the pump from a storm in U.S. Gulf. In 2005, hurricane Katrina increased Canadian gasoline prices around 20 cents a litre in Ontario and Eastern Canada. 

Read some of our other posts about How fuel gets from the refinery to your gas pump and Your questions about gas prices answered part 1 and part 2
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