by Bryan Perry

May 18, 2021

America’s energy sector has shown once again how vulnerable it is to natural and man-made events following the shutdown of the Colonial Pipeline that was resolved with a $5 million ransomware payoff in difficult-to-trace cryptocurrency, underscoring the immense pressure faced by the Georgia-based operator to get gasoline and jet fuel flowing again to major cities along the Eastern Seaboard.

The hackers, whom the FBI said are linked to a group called DarkSide, specialize in digital extortion and are believed to be located in Russia or Eastern Europe. Markets were affected in 13 states (Texas, Louisiana, Mississippi, Alabama, Tennessee, Georgia, South and North Carolina, Virginia, Maryland, Delaware, Pennsylvania, and New Jersey) and DC.

Colonial Pipeline Image

Back in December 2020, a group believed to be Russia’s “Cozy Bear” gained access to government and other systems through a compromised update to SolarWinds’ Orion software. A page on Orion’s website (taken down after the news broke out) stated that its customers included 425 of the Fortune 500 U.S. companies, the top 10 U.S. telecommunications companies, the top five U.S. accounting firms, all branches of the U.S. Military, the Pentagon, State Department, and hundreds of universities.

In an April 12, 2021 interview between Scott Pelley and Fed Chairman Jerome Powell on 60 Minutes, it became clear that the #1 threat to the economy and stock market in the mind of the Fed is cyberattacks.

Scott Pelley: The chances of a systemic breakdown like in 2008 are what today?

Jerome Powell: The chances that we would have a breakdown that looked anything like that, where you had banks making terrible loans and investment decisions and needing and having low levels of liquidity and weak capital positions, and thus needing a government bailout, the chances of that are very, very low. Very low. But the world changes. The world evolves. And the risks change as well. And I would say that the risk that we keep our eyes on the most now is cyber risk. That’s really where the risk I would say is now, rather than something that looked like the global financial crisis.

Pelley: Well, when you talk about cyber risk, what are you talking about? What kind of scenarios are you looking at?

Powell: There are scenarios in which a large financial institution would lose the ability to track the payments that it’s making. Where you would have a part of the financial system come to a halt, or perhaps even a broad part. And so, we spend so much time and energy and money guarding against these things. There are cyber-attacks every day on all major institutions now.

Cyber-crime comes in many forms. They include:

  • Indiscriminate attacks that are wide-ranging, global and do not seem to discriminate among governments and companies.
  • Destructive attacks, inflicting damage on specific organizations.
  • Cyberwarfare: Politically motivated destructive attacks aimed at sabotage and espionage.
  • Government espionage: Attacks related to stealing information from or about government organizations.
  • Corporate espionage: Attacks related to stealing data of corporations related to proprietary methods or emerging products and services.
  • Identity theft: Stolen e-mail addresses and login credentials related to stealing web resources.
  • Stolen credit card and financial data.
  • Stolen medical-related data, such as the 2014 and 2015 attacks on Anthem, Premera Blue Crossand CareFirst, which together netted information on more than 91 million people.
  • Hacktivism to promote political agendas, such as Julian Assange’s 2010 Wiki Leaks publishing of U.S. Army intelligence against Chelsea Manning.

According to Mimecast, a cloud security firm, more than six in 10 companies suffered a ransomware attack last year and 79% of all organizations were hurt by their lack of cybersecurity awareness. Ransomware attacks were up over 300% in 2020. Clearly we live in digitally dangerous times where the rapid technological advances in artificial intelligence (AI) are giving the bad guys the upper hand.

Unfortunately, there is no bulletproof preemptive defense system that thwarts attacks before they have violated some form of protocol. Almost all measures to rid cyberattacks are responsive to being violated. And all it takes is one opening to penetrate an entire database or network.

One of the challenges with cyberterrorism incidents as opposed to state-sponsored cyberattacks is that they are asymmetrical, says Joseph Carrigan, a senior security engineer on the staff at the Johns Hopkins Security Information Institute in Baltimore. When nations are involved in cyber warfare, both sides have infrastructure that can be targeted in retribution – hence they are symmetrical. That is not the case for terrorists – a group can take down a power grid and there is nothing commensurate that the U.S. can target in response. That makes fighting cyberterrorism particularly challenging, says Carrigan.

In particular, Carrigan is concerned about vulnerabilities in the energy and financial sectors, a situation that is exacerbated since systems today are so interconnected. Bringing down a power grid for a few hours – what he calls “a quick hit if you will, is enough to undermine the confidence and security of the American public. And that in and of itself has far reaching effects.” Taking down a power grid for a bit longer – say two or three days – can have a cascading effect on the food supply, water system, and economic activity. Taking down the grid for two or three weeks would badly cripple society.

The one-week shutdown of the Colonial Pipeline revealed how disruptive a well-executed cyberattack can be. The six-day Colonial Pipeline shutdown was the most disruptive cyberattack on record. Widespread panic buying continues after the network restarted, leaving filling stations across the Southeast out of gas.

Average Retail Gasoline Price Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

It’s very important that individuals and businesses have a cybersecurity response plan in place. Getting hit by cybercrime is not a matter of “if” but “when” in this day and age.

The main takeaway is that isolated attacks, even large ones like the Colonial Pipeline, had no material impact on the stock market, but they should serve as a major wake up call to all federal, state, and local authorities about preparedness. It would take something on a much larger scale to materially disrupt the financial markets, and the new infrastructure spending bill will no doubt take aim at rapid response systems to restore power, water, communications, and Internet services if they were taken down from cyberattacks. At the same time, cyber threats have “black swan” capabilities, just like pandemics.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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