Saturday, 19 Jun 2021

Opinion | Why Charles Koch Wins When Our Energy System Breaks Down

When the Colonial Pipeline shut down in 2016, it sent a grave warning about America’s fragile energy system. Once the gasoline stopped flowing, thanks to an accidental breach by a construction crew in Alabama, millions of people along the East Coast who relied on the nearly 60-year-old, 5,500-mile-long sometimes leaky pipe for their daily energy needs suddenly felt marooned. Backup supplies dropped. Prices spiked in some markets.

It seemed like the sort of crisis that might spur some hard thinking about America’s energy infrastructure. Instead, after the gas started flowing again, everyone seemed to forget the pipeline even existed.

That changed last week when a cyberattack crippled the pipeline, once again forcing its closure. Familiar scenes played out: long lines at gas stations in states like Georgia and South Carolina, with frustrated motorists and “out of service” signs hanging on empty pumps. Although Colonial restarted operations on Wednesday evening, it could take days to restore full service after the long closure.

In the United States, we live in the worst of all energy worlds, one whose fate hinges on an aging, increasingly unreliable fossil fuel infrastructure dominated by a very small group of very profitable corporations. Yet lawmakers, paralyzed by political fights fueled by these entrenched corporations that profit from the status quo, are often unwilling or unable to either fix the system or build something new.

Every time the Colonial Pipeline fails, it shows us that we can choose one of two solutions to the problem: Reinvest in the fossil fuel economy by laying more pipelines and building more oil refineries. The alternative? Investing in a new system with a decentralized industry based on renewable fuel sources. But when offered these two choices, America has stubbornly insisted on fully committing to neither.

In normal times, Colonial’s pipeline can carry about 3 million barrels of fuel each day from a cluster of refineries near the Gulf of Mexico up through the eastern corridor. It provides about 45 percent of the fuel in the East Coast market, along a path that snakes from Texas to New York. To keep up with demand, it often operates at 100 percent capacity, leaving very little room for error. Shortly after it closed in 2016, the price of a gas contract shot up 15 percent. Just a few days into the latest closure, panicked motorists were hoarding supplies. Of course, there are also those well positioned to profit from systemic dysfunction.

In this case, the biggest beneficiaries from this dysfunction are the five companies that own the Colonial Pipeline. They profit handsomely off its operations and earn outsize profits in the face of the bottlenecks and supply squeezes caused by shutdowns. From 2014 to 2017, Colonial’s average dividend payment was about $300 million a year, according to Moody’s.

Yet even as the pipeline spewed money as reliably as an A.T.M., it was breaking down. In 1999, Colonial pleaded guilty to criminal negligence for a leak that spewed almost 1 million gallons of diesel fuel into a South Carolina waterway, killing fish and other wildlife. In 2016 a team of contractors in Alabama trying to fix a leak in the pipeline accidentally ruptured it, releasing a geyser of fuel that ignited and killed two workers and severely burned others. But this didn’t seem to hurt the owners’ earnings. After the accident, Colonial boosted its annual dividends — at least in part because of the Trump administration’s 2017 tax cuts, according to Moody’s — to $670 million in 2018 and $458 million in 2019.

When it comes to updating and protecting the pipeline, Colonial’s efforts have been, at best, underwhelming. In 2015, it spent $163 million on capital investments, including measures to update the system’s reliability. But according to a Moody’s report from 2020, the growth of such investments has been “modest,” while dividend payments have risen sharply. For instance, the company’s software system was vulnerable to the recent ransomware attack, in which hackers penetrated the system and held company data captive to extort payment. A preliminary investigation showed that Colonial had poor safeguards against hacks, even after years of increasing media coverage pointing out that such attacks were becoming more common.

The F.B.I. said a criminal group known as DarkSide was responsible for the Colonial hack. The company reportedly paid the gang roughly $5 million worth of cryptocurrency to unwind the attack.

A Colonial spokesman defended the company’s focus on safety and said some of the financial gains from the Trump tax cut were steered toward technology investments, although he did not say how much. He said total spending on the pipeline’s IT system had risen by nearly 50 percent since 2017, without giving a figure for total spending.

The fact that the owners of the pipeline upped their payout in the face of systemic failure isn’t unique to Colonial. But the company does have a knack for making money even in the midst of crisis.

Koch Industries, the industrial conglomerate run by the billionaire Charles Koch, is the company with the largest ownership stake in the pipeline. He has profited for years off similar energy bottlenecks in the upper Midwest, where gasoline supplies can be tight. Pine Bend, a Koch refinery in Rosemount, Minn., for example, has been a steady source of profit for decades, according to current and former company officials. It owes its profitability to its location in the middle of a broken fuel market. Koch buys cheap crude for Pine Bend from an oversupplied market of Canadian high-sulfur crude, which requires specialized equipment to process. Koch then sells its finished fuel into an undersupplied gasoline market in the upper Midwest. Gas prices in the Midwest can stay high even when prices drop nationally, largely because of a refinery shortage.

Regulatory hurdles have paved the way for these profits for decades. In the 1950s, President Dwight Eisenhower capped oil imports to protect the domestic market but gave a rare exemption that benefited the Pine Bend refinery, granting the company lucrative, special access to cheap crude. In the 1970s, the Clean Air Act imposed pollution standards on all new oil refineries. These standards made it nearly impossible for competitors to open a refinery near Pine Bend that might take some of its market share.

This was not, of course, the goal of the Clean Air Act. But over the years, the issue of keeping regulation fair between old and new refineries got bogged down in legal proceedings and regulatory fights that benefited big refiners that could afford to litigate such matters. Koch can afford to hire expensive legal experts and lobbyists, while many start-ups that might change the market dynamics by opening it up to a whole new field of competitors cannot. This entrenches the market power of the Pine Bend refinery and the Colonial Pipeline. At every step of the way, Koch benefits from regulatory stasis and dysfunction.

The political stalemate over this fight has further entrenched the market position, and the profits, of companies like Koch. Protest movements across the country have halted new pipeline projects that could hurt Koch’s position. The long-delayed Keystone XL pipeline, which President Biden canceled in his first day in office, for example, might have opened markets for the high-sulfur crude used at Pine Bend, pinching Koch’s advantage. New pipelines in the South, which environmentalists and some property owners resist, could provide competition for Colonial. Alternatively, new wind farms or solar installations could open up a whole energy market.

While Mr. Koch famously promotes a libertarian agenda that seeks to limit the reach of government and opposes public efforts to boost renewable energy, the truth is more complicated: Just by letting the broken market limp along, Koch Industries reaps extraordinary profits from a broken system. This is true along the path of the Colonial Pipeline; its business model isn’t in jeopardy. When the gas stations are fully supplied, its owners can once again enjoy the profits that come from controlling nearly half of the East Coast’s gasoline market.

When the next crisis hits the Colonial Pipeline, it will once again shut down. Panic buying will resume. And people will ask, yet again: How did this happen?

Christopher Leonard (@CLeonardNews) is the author of “Kochland: The Secret History of Koch Industries and Corporate Power in America,” and the director of the Watchdog Writers Group at the Missouri School of Journalism.

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