The Colonial Pipeline hack affected gas prices less than we thought
The ransom paid to the attackers of the Colonial Pipeline in May 2021 was said to be around $5 million, but the disruption to the flow of the largest fuel pipeline in the United States was potentially much greater, with the six-day stoppage resulting in both price increases at the pump and fuel shortages.
A recent paper from the University of Kansas explores just how disruptive the shutdown was after media stories at the time of the hack predicted that the hack of the pipeline, which supplies around 45% of the gas to the East Coast, would result in price rises of around $0.11 per gallon at the pump. The paper suggests the actual rises were somewhat less than that.
"When looking at the six days from the closure to its reopening, there's barely any price effect until the very end of this period,” the authors explain. “What we really saw was delayed and persistent impacts. So when we read in the news how the problem had been solved and the pipeline's being reopened, that's actually when we truly began to feel the effect of this."
The researchers examine the changes in the daily gasoline price at a city level before utilizing a difference-in-difference approach to drill down into the various demand-side factors that could influence the price. They accept that prices rose to their highest point in seven years during May, but they contest that the hack on the pipeline had a minimal impact on that rise and indeed only contributed to a 4-cents-per-gallon increase in the average gas price in the areas affected by the pipeline.
The 5,550-mile Colonial Pipeline is the biggest in the United States for refined oil products and carries around 3 million barrels of fuel each day between Texas and New York. This represents the bulk of fuel supplies for both the East Coast and the Southeast. While some of these areas may have local refineries or access to seaports they can import fuel from, the majority are heavily reliant on the Colonial Pipeline. The authors argue that the dependence of these states on oil products had been rising prior to the attack.
"At the time, we were seemingly coming out of the pandemic situation," they say. "The economy was growing, more jobs were being created. Those were all demand-side factors that were pushing gas prices up. So the trick is, how do you parse out what would have been happening regardless of the fact of the pipeline shock?"
Nature of demand
The authors argue that demand for gas in the United States is largely inelastic, which means that it doesn’t tend to change much even if the price goes up. This is because people need to drive their cars to work and so there will be a certain level of consumption that is very unlikely to change no matter what happens in the market. This in turn, tends to affect our consumption of other goods, as more of our household spending goes on fuel, we cut down on other items.
The attack, which resulted in a $4.4 million ransom being paid days after the attack, albeit with around half of that recovered by the Justice Department the next month. Despite this, the attackers have not been caught.
"Highlighting the threat of cyberattacks in the future is becoming more of a common topic," the authors explain. "This is one of those things where the more we see it, the more it perpetuates itself because criminals learn that they can do it and get away with it. It will be a race on both sides—a race to improve protection against it and then to get even better at cracking those new defenses."
To try and deter similar attacks in the future, the Department of Energy has requested an increase in funding for 2022 to specifically tackle the cyberthreat as hackers begin to understand both the strategic importance of such cyber-physical systems and their inherent vulnerabilities.