Colonial pipeline hack exposes the vulnerability of critical infrastructure

The ransomware attack on the Colonial pipeline system had only a marginal impact on fuel markets, but could have been much more serious.

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When the Colonial pipeline system was launched in 1962, it was described as the largest privately-financed construction project in US history. Six decades later, it remains a critically important piece of national infrastructure, as the six-day shutdown caused by a ransomware hacking attack has shown.

Spanning more than 5,500 miles between Texas and New Jersey, the Colonial system carries about 2.5 million barrels a day of gasoline, diesel and jet fuel, transporting about 45% of all the fuel consumed on the US east coast. When it shut down last Friday, it quickly became a political issue, with Republicans making a link to Democratic climate policies, and the administration saying it was mounting an “all-of-government effort” to address the incident.

Federal and state officials from President Joe Biden on down urged the public to hold back from panic buying, but as gas stations from Florida to Maryland started to run out of fuel, it was clear those pleas had had little effect. Once panic buying is threatened, it is individually rational for everyone to fill up their tanks, and fears of shortages become self-fulfilling. The US Consumer Product Safety Commission worried that “when people get desperate they stop thinking clearly”, and reiterated warnings against trying to store gasoline in plastic bags.

However, Wood Mackenzie’s real-time assessment of fuel stocks, including a helicopter flight on Monday over storage tanks in New York Harbor at the far end of the pipeline, showed that inventories were not collapsing. Gasoline inventories in New York Harbor were down just 0.1% since the previous Thursday at about 16 million barrels, while diesel and fuel oil stocks were down 6% at about 6.2 million barrels.

A combination of increased output from US refineries and imports muted the impact of the disruption on the Colonial pipeline. US east coast refineries raised their product output by about 44,000 barrels a day from last week, Wood Mackenzie modeling showed. And already scheduled gasoline imports from Europe arriving this week in the PADD 1 region on the east coast were expected to be 200,000 b/d higher than last week. Wood Mackenzie’s Mark Williams and Alan Gelder commented that the market had “largely shrugged off the incident”, with New York Harbor gasoline prices broadly flat after an initial jump on Monday morning.

On Wednesday, Colonial announced that it had begun to restart the pipeline, although it would take several days for deliveries to return to normal. News outlets reported that a ransom of nearly $5 million had been paid to the hackers. Hillary Stevenson, Wood Mackenzie’s director of oil markets short-term analytics, said she expected that the system should mostly be caught up back to normal in about 10 days, so long as there was no physical damage caused by the shutdown and restart.

Some of the emergency responses are still continuing. The temporary relaxation of gasoline quality specifications in some states, put in place to help ease fuel shortages, remained in effect. And on Thursday, the Biden administration approved one Jones Act waiver, allowing a non-US flagged tanker to carry products from the Gulf of Mexico coast to east coast ports, and said it was considering other applications.

Had the shutdown persisted, the impacts would have become more serious. More Jones Act waivers would probably have been issued, making it easier to ship gasoline from the Gulf to the east coast. Markets further inland would generally have faced the greatest challenges in keeping supplied. The biggest beneficiaries would probably have been European refiners, which could have sold an additional 500,000 b/d of gasoline to the US, boosting profitability even if refinery margin improvements might have been relatively modest.

As it is, the only clear winners have been the hackers, identified by the FBI as a group called DarkSide. The obvious concern about paying the ransom is that they and others will incentivised to try similar attacks in the future. Pete Buttigieg, transportation secretary, described the hack as a “wake-up call” exposing the vulnerability of US infrastructure to cyber attacks.

Some were reminded of Rudyard Kipling’s poem ‘Dane-Geld’, a reference to the gold that the English and French used to pay off Viking raiders in the 10th and 11th centuries. Wealthy nations might think “we will therefore pay you cash to go away”, the poem says, but “if once you have paid him the Dane-Geld, you never get rid of the Dane”.

Elon Musk turns against power-hungry Bitcoin

The celebrity power of Elon Musk was on full display this week. Over the weekend, he became the first car company CEO ever to appear as the guest host on Saturday Night Live, which was an opportunity for him to so some personal brand-building. On Thursday he stirred up a flurry of excitement by tweeting in support of a carbon tax. In between, he sent a tweet that triggered a plunge in the price of Bitcoin. Tesla was “concerned about rapidly increasing use of fossil fuels for Bitcoin mining”, he wrote, and the company would no longer allow people to buy cars with it.

It was a rapid volte-face. Musk had been making positive comments about Bitcoin for a couple of years, and his support became concrete in February when Tesla revealed it held $1.5 billion worth of Bitcoin and would start accepting the cryptocurrency as payment for its vehicles. Just three months later, Musk is arguing that while cryptocurrency is a good idea with a promising future, “this cannot come at great cost to the environment”.

He described the recent growth trend in Bitcoin’s energy use as “insane”, citing estimates from the Judge Business School at Cambridge University that suggest Bitcoin’s power consumption is around 19.5 gigawatts (GW), but could be as high as 67 GW. The Cambridge central estimate has more than doubled since October, and now suggests Bitcoin uses more power than Malaysia, and almost as much as Egypt or Poland.

Wood Mackenzie’s Isaac Maze-Rothstein wrote recently about how Bitcoin can support the transition to lower-carbon energy, in part by providing flexible interruptible demand that can help pay for variable wind and solar power. “Bitcoin mining was not designed to enable the energy transition, but some of its features could shift the energy value chain”, he said.

At the moment, however, a significant proportion of Bitcoin’s total energy demand is met by coal-fired power in China. A recent study in Nature suggested that greenhouse gas emissions from Bitcoin mining in China are on course to equal the entire output of the Czech Republic or Qatar by 2024. The approval granted last month for a gas-fired power plant in upstate New York to use most of its capacity for Bitcoin mining has brought the issue into sharp focus in the US. The state of Kentucky in March passed legislation offering tax breaks to cryptocurrency miners, in the expectation that it will boost demand for electricity.

Musk said in his statement that Tesla would resume use of Bitcoin “as soon as mining transitions to more sustainable energy”, and that the company was looking at other cryptocurrencies with less than 1% of the energy use per transaction. ESG considerations are increasingly becoming an issue for cryptocurrencies, as they are in other forms of investment, and there are several alternatives to Bitcoin that are promoted partly on the basis of their lower energy consumption.

Musk’s comments about Bitcoin this week caused it to lose more than 12% of its value within a couple of hours. His words clearly carry weight, and we are likely to see Bitcoin miners and users do more to try to reduce their emissions to address concerns about its climate impact. For the moment, Musk has at least turned a profit on his venture into cryptocurrency. Tesla bought its holding at an average price estimated at $34,700 per bitcoin, and even after the plunge this week it is still trading at around $49,000. Tesla also cashed in on about 10% of its holding, selling it for a profit of about $101 million.

A warning on China’s ability to dominate the EV industry

This week’s other Tesla news probably matters more for the company’s long-term future. The company’s sales from its plants in China, one of its major markets, fell by 27% in April compared to March. Worse, more than half of those cars were exported. Its sales to Chinese buyers were estimated to have fallen by 60%. Meanwhile, Reuters reported that Tesla has halted plans to buy land to expand its Shanghai factory, as a result of continuing tensions between the US and China.

Ivan Glasenberg, chief executive of the commodities group Glencore, warned this week that US and European electric vehicle manufacturers could struggle to compete against their Chinese rivals if they failed to secure supplies of essential battery raw materials. He told a Financial Times conference that US and European car manufacturers often seemed to assume that they would always be able to buy batteries from China, “but what happens if that doesn’t occur and the Chinese say we are not going to export batteries, we are going to export electric vehicles. Where are the batteries going to come from?”

Glasenberg was talking about his own book. Glencore has contracts with car manufacturers to supply battery raw materials, and has been in negotiations to supply more. But he raises an important point in highlighting China’s dominance in the supply chain for many low-carbon technologies. It is an issue that we covered in detail in our March Horizons piece: ‘Tectonic shift: China’s world-changing push for energy independence’. As that report says, China’s leading position in technologies such as batteries, EVs and solar panels is “a major headache for much of the developed world”.

In brief

Indicators of inflation in the US have risen to their highest levels for more than a decade, sparking a vigorous debate over whether the price pressures are lasting or temporary consequences of the rebound in the economy. The Consumer Price Index rose 4.2% in the year to April, its strongest increase since September 2008, and the Producer Price Index rose 6.2% over the same period, its fastest rate since it was first calculated in 2010. The threat of inflationary expectations becoming entrenched in the economy raises the prospect that the Federal Reserve could bring forward interest rate increases. Fed officials signalled in March that they did not expect to start raising rates until 2023.

One factor in consumer inflation has been the rising cost of fuel. The average retail conventional gasoline price in the US rose to $2.86 a gallon this week, its highest since May 2018 and up more than a dollar in the past 12 months. Over the past year, benchmark WTI crude has risen from about $25 a barrel to about $65 this week.

Another price that has been rising sharply is that of carbon allowances in the European Emissions Trading System. They hit a new record high above €55 per ton of carbon dioxide equivalent this week, having risen from below €30 last November. At these levels, the cost of allowances is at a level that would put gas-fired combined-cycle gas turbine plants ahead of lignite in the electricity generation merit order, encouraging a shift from coal to gas and cutting emissions from power generation.

While the DarkSide hackers successfully shut down one US oil pipeline, the governor of Michigan has so far failed to shut another. Governor Gretchen Whitmer had set a deadline of Wednesday, May 12 for Enbridge to shut down its Line 5 crude and NGL pipeline, describing it as “a grave threat to Michigan’s environment and economy”. As of Friday, Line 5 was still in operation, flowing at a rate of almost 600,000 b/d. The future of the pipeline will be fought out in the courts.

Washington state’s legislature has passed “the nation’s most ambitious climate policy”, setting a carbon cap to cut emissions by 95% by 2050.

The New Scientist carried a troubling report about the site of the Chernobyl disaster, describing “a surge in fission reactions in an inaccessible chamber within the complex” that scientists cannot fully explain. Researchers are studying the inactivity to see whether they might need to intervene to prevent an explosion, for example by spraying the chamber with fluid to choke off the fission reaction. The accident at Chernobyl happened 35 years ago last month, and reports marking the anniversary noted that the area around the site has become an unlikely nature reserve, with the population of wild horses flourishing.

And finally: an enterprising attempt to capitalise on Chernobyl’s notoriety to raise revenue for local communities. ATOMIK vodka is a company planning to make spirits from grain grown in the Chernobyl Exclusion Zone, diluted with mineral water from a deep aquifer below the town of Chernobyl, about six miles from the nuclear power station. The company says that two laboratories could find no trace of Chernobyl radioactivity in the distilled spirit. Unfortunately, a first small-scale batch of apple brandy, made from apples grown just outside the exclusion zone, was seized in March by Kyiv City prosecutors before it could be exported to the UK. The action had nothing to do with safety concerns, however: the prosecutors accused the company of using forged excise stamps.

Other views

Simon Flowers — Is the price rally in energy and metals sustainable?

Gavin Thompson — Australia-China relations continue to sour

Jonathan Sultoon — Which technologies will drive the energy transition?

John Kemp — Carbon pricing: markets, taxes or regulation?

Robinson Meyer — 2050 is closer than 1990

Lisa Song and James Temple — A nonprofit promised to preserve wildlife. Then it made millions claiming it could cut down trees

Frances Coppola — From carbon to metals: the renewable energy transition

Quote of the week

“Is it too late, and is it therefore not realistic? No, I wouldn’t say so. But it will require every ounce of collaboration and coordination that this world can muster, at a level we have never seen before”. — Ben van Beurden, chief executive of Royal Dutch Shell, talked about the world’s chances of achieving the Paris climate agreement’s aim of limiting global warming to 1.5° C, in an interview for Axios on HBO.

In the same interview, he suggested that within the next decade Shell could have more than half its business in low-carbon energy. “If we do not make that type of process by the middle of the next decade, we have a problem”, he said. “Not just as a company, but as a society”.

Chart of the week

You may remember that a couple of weeks ago I wrote about the shutdown of the last reactor at the Indian Point nuclear plant in New York state. When the debate over whether to close the plant was at its height, environmental groups argued that renewable energy would be able to make up the generation lost when it shut down. That did not seem to be the case when the first of Indian Point’s two remaining units was closed last year — instead, it was mostly increased gas generation that replaced the lost power — and the early evidence is that it has not been true for the second and final unit either. This chart, from Wade Schauer, Wood Mackenzie’s director of Americas power research, shows the impact of the two reactors at Indian Point going offline.

The bar on the left shows the generation mix on the New York grid for May 1-10 in 2019, when both units at Indian Point were still running, and the bar on the right shows the mix for the same period of 2021, after the final unit went offline on April 30. The picture is clear: the drop in nuclear generation, in brown, has been matched by an increase in gas-fired generation, in green. It is still very early days, of course, and New York plans to develop a lot more renewable energy. But the chart is a reminder that when nuclear capacity is lost, it is likely that higher-carbon generation will replace it.