Philadelphia Inquirer

Oil shock: Key Alaska field shut

Prices spiked, and analysts said gas could go up 10 cents.
By Harold Brubaker, Inquirer Staff Writer

August 8, 2006

Yesterday's shutdown of the biggest U.S. oil field could easily add 10 cents per gallon at the gasoline pump over the next two weeks, according to oil-industry analysts.

Usually, hurricanes in the Gulf of Mexico are to blame for summer turmoil in oil markets. But yesterday the big shock came from Alaska, where BP is shutting down the oil field at Prudhoe Bay.

Oil prices jumped more than $2 to close at nearly $77 per barrel on the New York Mercantile Exchange in response.

The analysts' prediction of a 10-cent boost in gas prices could turn out to be an optimistic view.

One energy expert said yesterday that oil markets might be underreacting to the loss of 400,000 barrels per day of production from Prudhoe Bay.

"It increases dramatically our vulnerability at a time when we're already extremely vulnerable," said Andy Weissman of FTI Consulting in Washington.

"We're at such a precarious time. We seem to be headed for confrontation with Iran. The Nigerian situation has been precarious all year long," said Weissman, referring to major oil producers. To that, add the continuing insurgency in Iraq and missiles flying over the Israel-Lebanon border. Plus, the hurricane season is far from over.

If the BP production in Alaska is shut down for an extended period, oil prices could easily rise $10 a barrel, Weissman said.

Other analysts said oil was trading higher than warranted by the fundamentals of supply and demand.

The "Prudhoe field loss is simply the latest 'excuse' for the market to trade higher," said Tom Kloza, chief oil analyst for Oil Price Information Service in Rockvale, Md.

The loss of Alaskan production came out of the blue and drove home the point that little can be taken for granted in the energy markets.

"We knew, and we still believe, that we had to look at the tropics (hurricane development) and the Middle East for news that would impact oil," Kloza said in an e-mail. "We didn't suspect that we would have to look north of the Arctic Circle."

The underlying problem in world oil markets is the squeeze on surplus production capacity caused by demand growing faster than new oil fields can be discovered and brought into production.

Since 2002, surplus capacity has fallen from more than five million barrels per day to about one million barrels per day, according to estimates from the federal Energy Information Administration.

That decline has made it harder for oil companies to make up for production problems.

And production problems anywhere in the world can quickly have widespread repercussions because prices are linked in the minds of traders on the world's commodities exchanges.

"Markets trade more on psychology than on economics," said Stephen Schork, editor of The Schork Report, an energy-markets newsletter. Schork, based in Villanova, said the loss of Prudhoe Bay could send oil to $80 a barrel.

So even though none of the crude oil from Alaska comes to the East Coast for refining, prices paid by refiners here for oil from Saudi Arabia and Nigeria could rise because the market for oil is global.

And refiners set gasoline prices not just by looking at local competition but also by looking at the spot market for imports and at activity on commodities exchanges.

The widely quoted oil benchmark on the New York Mercantile Exchange is a futures contract for West Texas Intermediate crude oil. It is a high-quality oil, a large proportion of which can be used to make gasoline.

The significance of the Prudhoe Bay loss will come down to how long the field is closed, which no one knows yet. If it is eight weeks, that would be the equivalent of one day's oil consumption in the United States.

The high profile and the potential environmental sensitivity of the BP site in Alaska could mean it will be a long time before the field can be reopened, Weissman said. "Frankly whether there are major risks or not, the burden that has to be met before restarting the facility tends to be very, very high."

Contact staff writer Harold Brubaker at 215-854-4651 or hbrubaker@phillynews.com.