Supply Chain Frontiers issue #38
The debate over deep water drilling continues to rage following the Vermillion oil rig explosion in the Gulf of México this September, and BP’s announcement that the cost of its oil spill in the same waters has reached $8 billion. But there is another dimension to the debate that so far has been overlooked: the vulnerability of the country’s ports to such calamities.
Just as BP and its partners were seemingly unprepared for the systemic failures that led to this disaster, the 310 ports in the United States do not appear to be prepared for large-scale disruptions that could obstruct maritime trade. While businesses are investing in ways to make their global supply chains more resilient, the resilience of ports has received scant attention. Yet these vital gateways also need business continuity plans.
A study of the US port system under way at the MIT Center for Transportation & Logistics (MIT CTL) shows that a lack of information about cargo capacity and a heavy reliance on specific facilities for certain types of cargoes put maritime commerce at risk when such open water disasters occur.
The sinking of BP’s Deepwater Horizon oil rig demonstrates the risks. When the huge oil slick caused by the stricken rig spread into the waters of the Gulf of México and beyond, cargo vessels were routed around the spill. If the slick had continued to spread, the impact on maritime traffic flows – and the associated costs – would have been much greater. Moreover, since 70% of the goods imported into the United States arrive via seaports, any major disruption to the transportation network – such as the closure of a key facility – could have serious consequences for the national economy.
Yet the backup plan for dealing with port disruptions depends completely on free-market mechanisms that ultimately find the next least expensive route for the goods to reach their intended final destination. It can be argued that our free-market system is flexible enough to keep cargo moving even when disaster strikes. But what happens when a cargo-handling facility closes and there are few, if any, alternatives? Is there enough port capacity to support maritime trade when a serious disruption occurs?
The MIT CTL study is being carried out in part under the auspices of the Center for Secure and Resilient Maritime Commerce, which is funded by the Department of Homeland Security. The study polled a wide cross-section of port stakeholders on these issues. The project also includes a study of port capacity. While the research is still in progress and deals with cargo volumes on an annual basis, we have discovered, to our surprise, that there is no central capacity estimate for the 310 ports that handle the majority of US imports. In other words, no one actually knows whether the US ports have enough capacity to handle import volumes if one or more ports close. Some believe that there is plenty of capacity, but do we really know?
Early indications from the MIT CTL study suggest that if certain groups of port facilities are disabled, the impact on maritime commerce and the US economy could be severe. For example, the top three ports for handling food and farm products receive about 45% of the total volume of these import cargoes. All of these facilities are located within a 50-mile radius in the New Orleans area. That represents a lot of eggs in the same basket. Hurricane Katrina caused a shortage of port capacity after it struck in 2005. There was an estimated loss of $882 million to agricultural trade; and in 2006, national food prices rose by 2.5% to 3.5%, according to Federal Reserve Bank estimates. No small impact.
Further, our preliminary observations indicate that the top 14% of petroleum products imported into the United States pass through Houston. If this port were disabled, other petroleum facilities would need an extra 18% capacity available to fill the shortfall. The potential impact on the container trades raises similar concerns. The adjacent ports of Los Angeles and Long Beach together handle about 20% of total US containers. A port disruption in this area could require other container facilities to have 36% capacity available to fill the shortfall. Both cases illustrate a concentration and potential shortage of capacity that amounts to a big risk for the US economy.
Port disruptions have caused economy-damaging impacts in the past. The 1995 earthquake in Kobe, Japan, destroyed 120 of the 150 quays in the port at a cost of $9 billion, and Kobe dropped from being one of the top-five container ports worldwide to number 45. By some reports, the US West Coast lockout in 2002 allegedly had a $20 billion impact on the broader economy.
The debate over offshore drilling sparked by the US Gulf oil disaster provides a wake-up call that the United States needs a Plan B to prepare its ports for a major disruption. It’s only a matter of time before we will need to use it.
This article by Jim Rice, Deputy Director, MIT CTL, and Researcher Kai Trepte is based on a piece that is scheduled to appear in the March 18, 2010, issue of the Journal of Commerce. For more information on MIT CTL’s ports research project, contact Jim Rice at email: jrice@mit.edu, or telephone: +1 617 258 8584.