Friday, April 15, 2011

Anatomy of a pipeline break

On July 30, 2003, the Tucson-to-Phoenix section of the gasoline pipeline from El Paso ruptured, until August 23, when partial service resumed.  In the graph above, it is easy to explain the increase in price in Phoenix (thick line) using supply-demand analysis:  supply of gasoline to Phoenix decreased, which resulted in a higher price.  It is even easy to explain the price increase in Los Angeles, several hundred miles away:  the increase in demand from Phoenix increased the opportunity cost of supplying gas to Los Angeles.  Recall that an increase in cost is represented as a decrease in supply to Los Angeles, which increased the price.  

What is more difficult to understand is why the price in Tuscon increased.  A simple analysis would suggest that the pipeline break would mean an increase in supply to Tuscon, reducing the price in Tuscon.  

What this analysis misses is the ability of "tank wagons" to transport gasoline from Tuscon to Phoenix.  In fact, they lined up for hours at the "rack" in Tuscon, waiting to fill their tanks with gasoline to deliver to Phoenix.  But since the rack in Tuscon was running at capacity, every time a tank wagon drove to Phoenix  this reduced supply of gasoline to Tuscon, increasing the price.  

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