Is America Over a Barrel?

[Zeb_Carter]

What Prudhoe Bay tells us about oil prices, get the scoop here.


"BP's unexpected shutdown of its oil production facilities in Alaska's Prudhoe Bay cuts U.S. domestic production by 400,000 barrels per day. That amounts to about 8 percent of domestic production and about 2.6 percent of daily consumption. The oil fields on the North Slope of Alaska produce a total of about 900,000 barrels of oil per day. Skittish world oil markets reacted by running up the price of oil by $2 to almost $78 per barrel (which is still a far cry from the $100 price achieved after the 1979 Iranian revolution)."

 

[cantdog]

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Economic Brief: Alaska Pipeline Shutdown and the Rise of Oil Prices
Drafted By:
http://www.pinr.com

The August 6 announcement by major oil company BP that it will need to shutdown 400,000 barrels a day of oil production in Alaska is the latest development pushing crude oil futures toward US$80 per barrel. BP's shutdown came after an oil spill was discovered in Alaska's North Slope in March. After finding the hole in the pipeline responsible for the leak, the company admitted that the crack was part of a larger pipeline corrosion problem that will force BP to replace 25 kilometers (16 miles) of a 35-kilometer (22-mile) pipeline that originates in Prudhoe Bay in Alaska. The production halt is expected to last 60-90 days. The Alaskan shutdown is the latest contributing factor to record high oil prices.

The upward trend of oil prices largely began in late 2003. At the start of the new century, oil prices fluctuated between $20 and $30 a barrel. The September 11, 2001 attacks on the United States damaged the U.S. economy severely, thus sending oil prices below $20 a barrel as a result of reduced demand. In the following two years, however, the U.S. economy began to rebound, increasing energy demand and causing an upward trend in oil prices.

Yet it was after the U.S.-led intervention in Iraq that oil prices began to escalate sharply. After it became clear to investors that the intervention in Iraq would be more complicated than originally predicted, uncertainty began to enter the energy market. This uncertainty was punctuated by an attack by Iraqi insurgents on an oil pipeline in northern Iraq in August 2003, a tactic that has been repeated regularly for three years now.

In 2004, the price of oil moved higher, hovering near $50 a barrel as a number of factors contributed to market instability. In addition to the deteriorating security situation in Iraq and the regular attacks on pipelines there, workers in oil-rich Nigeria launched a general strike to protest the rising domestic fuel prices.

By the end of 2005, oil prices hit $70 a barrel and stabilized between $60 and $70. The instability in Iraq, mounting ethnic unrest in Nigeria, concerns about Iran's nuclear program and growing energy demand in China were all to blame for the dramatic price increase. Contributing to the rise in oil prices was the surprise devastation caused by hurricane Katrina that devastated the eastern coast of the Gulf of Mexico, causing damage and supply disruptions to off-shore oil rigs and U.S. refining capacity.

More than halfway through 2006, oil prices have almost surpassed $80 a barrel. A mixture of growing unrest in Iraq, Russian gas cuts to Europe, the threat of sanctions against Iran, an escalating ethnic insurgency in Nigeria's oil region, a low-scale war between Israel and Lebanon, an attack on Saudi Arabia's Abqaiq oil facilities and now the shutdown of a section of BP's pipeline in Alaska are to blame for the price hike.

Nevertheless, the global economy has been able to withstand the sharp increase in oil prices. The world economy experienced positive growth in 2004 and 2005. However, inflation is on the rise, largely as a result of increased oil prices. With the current geopolitical outlook heavy with uncertainty, it can be expected that oil prices will maintain their current highs and probably continue to rise.

The current conflict between Israel and Lebanon risks spilling over into the region; the insurgency in Iraq has grown more sectarian and chaotic; ethnic insurgent groups in Nigeria have threatened to shut down the country's oil exports; China's energy demand remains high; a new hurricane season is approaching the United States in the coming months; and al-Qaeda and other Islamist militant organizations continue to make threats against oil interests in Saudi Arabia and elsewhere. Any significant reduction in oil exports -- coming at a time when oil producers are pumping at near full capacity -- will send oil futures close to or past $100 a barrel, contributing significantly to inflationary pressures that could derail state economies and cause a widespread economic recession.

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[cantdog]

There may be more to it than the bare facts of corrosion and shutdown. The spill and so on was reported in March.

BP corrosion problem many years old...