Energy Disruptions Are Causing Metals Production/Price Havoc

Unplanned global oil supply disruptions averaged more than 3.6 million barrels per day in May, the highest monthly level recorded since the U.S. Energy Information Administration started tracking global disruptions in January 2011.

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From April to May, disruptions grew by 0.8 million bpd as increased outages, largely in Canada, Nigeria, Iraq, and Libya, more than offset reduced outages in Kuwait, Brazil, and Ghana. Six months later, the U.S. is joining the energy disruption party. On Saturday, an explosion and fire in Alabama sent futures surging and traders scrambling to supply the East Coast states with fuel.

EIA Energy Disruptions
Oil supply disruptions as measured by the U.S. Energy Information Administration. Source: EIA.

Colonial Pipeline Co., which carries gasoline and other refined products from Houston to Linden, N.J., was forced Monday to shut its two main pipelines after a crew working near the site of a prior spill hit the line with construction equipment.

Pipeline Breakdowns

The company, owned by a group that includes Koch Capital Investments Co. and a unit of Royal Dutch Shell Plc, said its projected restart time may change as it gets more access to the site of the blast near Birmingham.

This was the second major supply disruption in as many months. A spill in September shut the line for 12 days, cutting supplies to 50 million Americans in the Southeast. The September spill caused gasoline prices spiked throughout the region, rising more than 20 cents a gallon in the Southeast, particularly around Atlanta.

Regulation of Pipeline Construction

The protests involving the Dakota Access Pipeline and its court-approved construction have caused uncertainty among oil traders, too. Not because of a disruption, per se, since the pipeline has not even opened, but because it has tightened supplies based on future assumptions. Traders and suppliers are anxiously awaiting the 470,000 bpd capacity that it promises. Oil futures bets that predicated on the pipeline opening have to be recalculated and that has caused prices to spike.

Energy Transfer Partners, the developer of the $3.8 billion proposed project recently issued a memo to employees that the pipeline is nearly 75% complete. The Obama administration has requested the company voluntarily halt construction on the project on federal land. The administration has also said it has asked the Army Corps of Engineers to come up with alternatives for rerouting the project.

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The 1,170-mile pipeline is planned to transport crude oil daily from the Bakken production area of North Dakota through South Dakota and Iowa to an existing pipeline in Patoka, Ill. It would travel less than a mile north of the Standing Rock Sioux Indian Reservation near Cannon Ball, N.D., crossing under Lake Oahe, a dammed section of the Missouri River that provides the tribe’s water supply.

The Standing Rock Sioux had previously challenged the pipeline in court but federal judge James Boasberg rejected its argument that the pipeline comes to close to tribal land and endangers the water supply. The Justice Dept., Corps. of Engineers and Dept. of the Interior stepped in and issued a joint statement asking Energy Transfer to stop construction on federal land. The problem with that, though, is that those departments have no power to stop Energy Transfer from continuing work on the parts of the pipeline that are on private land. So that has continued and the pipeline has reached the 75% completion state it’s in today which is pretty close to a point of no return when it comes to construction planning.

New Pipelines Face Opposition

The Wall Street Journal reports that more than 20,000 miles of new crude-oil pipelines have been built in the past decade, and natural-gas pipeline infrastructure has expanded as well, as production from U.S. shale formations increased rapidly, though these projects are also facing opposition.

But the pipes that carry gasoline, diesel and other fuels haven’t experienced the same growth, because fuel demand isn’t rising everywhere and because these lines tend to run through more populated areas than where crude is drilled and, therefore, face more public resistance.

Disruptions and delays cause havoc for energy intensive metals production. Steel mills and aluminum smelters require reliable energy sources as well as cost certainty for production and delivery.

As we recently noted in a post on the quest to fuel and iron ore reducing tower with hydrogen instead of natural gas, the potential for cutting emissions by changing the way we create metals and other industrial processes is far greater than that of fueling cars or homes simply because industrial plants use so much energy.

Source: U.S. Energy Information Administration.

Although global supply of petroleum products has far exceeded global consumption for the past year and a half, disruptions have plagued metals production and delivery.

There’s significant evidence that the supply/demand gap is narrowing, too. The Energy Information Administration says that gas prices are likely to continue rising in the short term.

Converting natural gas to electricity for energy intensive manufacturing is still far from an ideal system, too.

“Even though we have natural gas that is online and we have massive reserves nationwide, the infrastructure to be able to get the natural gas from those reserves to new electricity plants that are yet to be built,” said Michael Whatley, executive director of the Consumer Energy Alliance, “as well as the pipeline capacity… it’s going to be a challenge for us.

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