Today’s discount, tomorrow’s tragedy

In the near-term — such as the next eight weeks — there are risks to supplies of refined fuels serving US demand, especially in the Northeast. Current diesel inventories in New England and Central Atlantic are anemic. And every hurricane season, there is some risk that a major hit in the wrong place could disrupt highly concentrated Gulf Coast refining and distribution capacity, which is the principal source of supply for the East Coast.

In the mid-term — such as the next eight months — there are risks to supplies of energy serving European demand. Reduced fossil fuel flows from Russia have increased demand (and prices) for energy from elsewhere including the United States. There are some comparatively mild forecasts, but winter is coming. Major efforts to build inventory are underway (more). But mid-winter resupply will be much less predictable — much more liable to disruption — than in the recent past. Energy-related economic, social, political, and national security risks are rising… and not just for Europe (here and here and here and here and here).

In the long-term — such as the next eight years and more — there is a risk of accelerating climate change. According to an IPCC Special Report, “Without increased and urgent mitigation ambition in the coming years, leading to a sharp decline in greenhouse gas emissions by 2030, global warming will surpass 1.5°C in the following decades, leading to irreversible loss of the most fragile ecosystems, and crisis after crisis for the most vulnerable people and societies.” Reducing the use of traditional fossil fuels is an important element in “increased and urgent mitigation.”

These risks are related (I trust this is not a surprise). Because of long-term risks related to continued use of fossil fuels, fewer investments have been made overtime in maintaining, much less expanding legacy energy sources. Since 1992 over ninety US refineries have permanently closed (more). This has removed more than 6 million barrels per calendar day of capacity. US refining capacity is now more concentrated and, often, farther removed from demand than ever before.

As a result, near-term risks of US supply disruptions are higher than ever before, especially for places like New England and the mid-Atlantic that are far away from major sources of supply. There have been times when a mismatch in the Northeast’s supply and demand has attracted European — often Russian — refined product across the pound. This is much less likely to happen this winter. One of the reasons New England and Central Atlantic inventories are underwhelming is because Europe needs so much more from the US to replace what is not coming from Russia. The pull of high prices is attracting US diesel inventories to push outward toward Rio or Rotterdam or wherever the price is highest (here and here).

In an August 18 letter to several leading US refiners, the US Energy Secretary tries to counter the pull of higher prices. She wrote, “Given the historic level of U.S. refined product exports, I again urge you to focus in the near term on building inventories in the United States, rather than selling down current stocks and further increasing exports” (more and more). The threat of hurricane season was specifically referenced. In effect, the US energy secretary is arguing that the global diesel market is under-estimating the risk of hurricane season. The diesel price at New York Harbor ought to be higher. Well… maybe she is not saying that, given the risks of domestic inflation and related political risks. But pricing is how markets resolve risk differentials. [Increasing the risk of sky-high fuel prices will probably minimize actions to limit US exports.]

Markets are not infallible. Markets should not be our only risk-management method. But for other methods to equal or exceed the power of markets great clarity is needed. For too long humans discounted the risk of climate change. Now that climate change is belatedly, reluctantly, and inconsistently acknowledged by most, we have tended to discount the risk involved in making the energy transition required to mitigate climate change.

For too long many discounted the risk of Putin’s authoritarian hubris. Even with plenty of prior examples, troops massing, and pseudo-historical justifications for invasion on offer, Europe increased its dependence on Russia’s energy.

All of these risks have been discounted largely because positively engaging such “uncertainty” has seemed too expensive. As my father often says, “You get what you pay for.” My grandfather said, “The customer will forget about prices, but will never forgive poor quality.” [There is increasing evidence that my grandfather’s once-upon wisdom has now been overcome by events.]

What we have paid for is tightly constrained capacity that is sufficient to meet typical US demand and help close the gap elsewhere, as long as disruption or destruction does not hit the wrong place too hard. If a CAT-4 or 5 hurricane or earthquake or cyberattack or fire or a long list of other threats takes down the wrong place for long enough, even maximum seasonal inventories will not be enough to avoid cascading pain. This combination of high prices and poor quality suggests our previous discounts were delivered with hidden time-bombs.

TARA is a nice summary of our risk management options: We can Transfer, Avoid, Reduce or Accept risk. Discounting and denial are other words for accept.


August 31 Additional Comment: More than one reader has complained about the title for this post. “Strained alliteration.” “Hyperbole.” “A better choice would have been Today’s discount, tomorrow’s expense.”

Thank you. This feedback is helpful. Recently I have been leaning into snarky or cynical. I will work to straighten up.

I will also offer that for me a true tragedy requires a heroic character to make self-subverting choices. Tragedy is not just a terrible event, it is the consequence of good intentions gone seriously awry.