Problem in Alaska sends oil price up

THE BALTIMORE SUN

The world oil market's increasing skittishness in the face of disasters and war was exposed anew yesterday after BP PLC announced that it was shutting down a key Alaskan oil field, possibly for weeks or months, because of pipeline corrosion.

Oil prices soared $2.22, or 3 percent, to $76.98 a barrel as the BP news added to market jitters over continued fighting in the Middle East and myriad other threats to world supplies, which have been stretched thin as economic growth in the United States and China continues to shrink once-plentiful reserves.

Despite historically high oil reserves, analysts estimate that gasoline prices could jump by as much as 10 cents a gallon in coming days or weeks and top the record price set last fall after hurricanes in the Gulf of Mexico.

Until yesterday, Alaska's Prudhoe Bay field, 650 miles north of Anchorage, was among the few major oil-producing regions in the world that hadn't been threatened by equipment failure, hurricanes, war or political unrest.

Analysts say the market's strong reaction to the loss of less than one-half of 1 percent of worldwide output - an estimated 400,000 barrels of daily production -- shows how tight oil reserves have become and how dangerous continued production disruptions could be for the global economy.

Some predicted that oil could top $80 a barrel. The inflation-adjusted high is about $90 a barrel, reached in the early 1980s.

"Our whole culture is based on the automobile," said Brian Hicks, a fund manager with U.S. Global Investors. "This could potentially disrupt our way of life if oil prices were sustained at levels above $80 per barrel."

BP, the world's second-largest oil company, said it will have to replace 73 percent of the 22-mile transit pipeline it operates in the Prudhoe Bay field. The company found a leak and extensive corrosion in the pipeline Sunday during an inspection ordered by the Department of Transportation after a 270,000-gallon spill in March in another part of the field.

The pipeline being shut down supplies 8 percent of daily U.S. crude production. About 90 percent of the oil from the field is shipped to refineries on the West Coast, which might have to get alternative supplies from Asian companies. That could take weeks.

Oil markets calmed slightly yesterday when the Energy Department said it is prepared to open the government's emergency stockpiles if refiners request it.

The Strategic Petroleum Reserve has about 700 million barrels of oil stored in salt caverns along the Gulf Coast. The reserve has been periodically tapped when supplies are disrupted because of pipeline failures or other emergencies, but getting the oil to California and elsewhere could take weeks because of the long sail from the Gulf to the West Coast.

Tom Kloza, an analyst with Oil Price Information Service in Wall, N.J., predicted that within a couple of days, the national average price for regular unleaded gasoline would rise 5 cents or more, which would top the record of $3.057, set after Hurricanes Katrina and Rita hit the Gulf in September. The current average is $3.036. Gasoline futures rose 2.01 cents to close at $2.2516 a gallon in trading yesterday.

Kloza said the pipeline poses a serious problem but that a big hurricane affecting oil platforms in the Gulf of Mexico remains a bigger worry. That could send gas prices up 10 to 30 cents per gallon, he said.

"It's the storms I'm worried about, not this particular loss," he said, referring to the pipeline shutdown.

Fifteen to 20 years ago, the Prudhoe Bay shutdown would have barely registered. At that time, the spare crude production capacity was nearly 10 million barrels a day.

A disruption in U.S. output then could have been easily remedied with a call on Saudi Arabia, Kuwait and other oil-producing countries in the Middle East to boost production. With so much spare capacity, war or political disputes in any one country caused little concern.

Today, spare capacity is 1 million to 2 million barrels a day, and the quality of those reserves is far lower than it was in years past. Much of it is heavy crude, not the light sweet crude that most U.S. refineries are equipped to handle. The result is an oil market that runs scared with every hint of potential disruption.

Much of the concern these days is focused on the Middle East. At the top of the list is Iran, which has threatened to use oil as a weapon if the United Nations imposes sanctions over its uranium-enrichment program.

There is also concern that Iran could get dragged into Israel's fight with Hezbollah in Lebanon. Iran is a chief supporter of Hezbollah, which remains a sticking point in its tense relations with the West. Iran has the fourth-largest production among oil-producing nation.

"Israel and Lebanon don't necessarily affect oil production, per se, but any violence in that region is worrisome, and there is the concern that it could spread wider," said Rick Mueller, senior oil analyst with Energy Security Analysis Inc. in Wakefield, Mass.

Nigeria is another hot spot, Mueller said. A dispute among rival factions over oil revenues has led to attacks on oil production facilities, wiping out 800,000 barrels of daily production in the past year. That is twice the amount of production lost as a result of the Prudhoe Bay shutdown.

"That's a big story because it's light sweet crude, which is great for making gasoline," Mueller said.

Political uncertainty extends to oil-producing regions outside the Middle East and Africa. In Venezuela, the leftist government of Hugo Chavez - a vocal critic of the United States - has nationalized the oil industry. And in Russia, President Vladimir V. Putin is using oil as a political weapon in his effort to restore his country to global power, says Greg Werlinich, co-author of The Black Book of Personal Finance and president of Werlinich Asset Management.

Economists note that worldwide demand for oil continues to grow despite recent record prices. Explosive economic growth in China and India are partly responsible for the increase, but U.S. demand for oil is about 22 million barrels a day - about three times that of China - and growing.

"Demand for petroleum is extremely unresponsive to price in the short run," said Stephen Brown, director of energy economics at the Federal Reserve Bank of Dallas. "The way we use energy is really built into our economy. None of these are things you can just instantaneously change."

Economists and oil industry analysts agree that higher prices are probably here to stay because high demand, violence in the Middle East and volatile weather in the Gulf region are unlikely to diminish soon.

"The only thing that could derail this price advance is a worldwide global recession, and we haven't seen that as of yet, either," said Hicks, the Global Investors analyst.

paul.adams@baltsun.com

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