Step off the gas: Total fuel depletion unlikely, though demand drives prices up

A critical fuel shortage is unlikely, despite reports of panic buying and hoarding of gasoline along the East Coast, according to a West Virginia University supply chain expert.

John Saldanha, of the Chambers College of Business and Economics, said that while some gas stations in the southeastern U.S. have reported fuel outages, critical reserves can be tapped in the event of dangerously low supplies. He also noted the Colonial Pipeline shutdown represented another instance in a long line of supply chain disruptions seen during the COVID-19 pandemic.

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“The short answer is no (we’re not in danger of running out of fuel), but the short-term shortage is driving prices up. The reason is that only the transportation infrastructure has been disrupted and presumably not the storage operations. Typically, firms have several days and even weeks’ worth of inventory to supply their markets. Hence, once the pipeline is opened up again and the oil starts flowing, the demand will be met.

“Recall, that while serving a substantial portion (45%) of East Coast fuel demand, there are still other suppliers there and the federal government has eased fuel truck driver regulations allowing them to drive longer hours to make road deliveries of fuel to areas facing critical shortages. Even beyond the other 55% of supply from alternative sources, there are other critical reserves not including the strategic petroleum reserve that can be tapped to fill a long-term reduction in fuel supply. A critical fuel shortage is only likely if the source of the fuel i.e. a major refinery or region of crude oil e.g. Saudi Arabia or Middle East, gets disrupted. This is what happened with the OPEC embargo against the U.S. that caused the major oil shortages in 1973-74.

“The key takeaway is this is just another in a long line of supply chain disruptions at critical supply chain nodes or bottlenecks, including several seaport disruptions starting with the 2002 labor lockout at the Southern California ports that prompted President George W. Bush to invoke the Taft-Hartley Act to avoid major damage to the U.S. economy, and continuing to this year with the COVID-19 effects that delayed shipping in the same ports leading to shortages in many raw materials and consumer product goods.

“At the firm level, supply chain research has pointed to diversifying the supply portfolio or not ‘putting all your eggs in one basket,’ and developing contingencies such as ‘just-in-case’ inventories and expedited transportation strategies to bypass disrupted areas of the supply chains. Firms also maintain a ‘command and control center’ to manage supply chain disruptions and use ‘wargames’-like simulations to practice responses to supply chain disruptions.

“At the macro-level, industrial organizations (American Association of Port Authorities) and the federal government must work together to a) identify vulnerabilities in public infrastructure, b) ensure public infrastructure is protected from attacks by malicious agents, and c) provide contingencies to protect the public from the fallout of such attacks.” – John Saldanha, Sears Chair in Global Supply Chain Management and Associate Professor, WVU Chambers College of Business and Economics