08/11/2006: "The Alaskan Oil Situation: Disaster or Wake-up Call?"
It’s certainly true that oil production is a risky and sometimes volatile business. When things go right, it’s all good; when things go wrong, it seems like the wheels fall off.
Such is the case this week when British Petroleum (BP) announced a planned shutdown of a large portion of its Alaskan production due to corrosion in the pipeline. Even before all the details were known, the market responded amid fears that supplies would soon be limited. BP has 22 miles of transit lines that bring oil to the 800-mile trans-Alaska pipeline. About 16 miles of pipe will need to be replaced.
The quick rise in crude oil prices dropped slightly after further examination of the system provided hope that BP could continue some production even while the pipelines were being replaced. Other nations, particularly Mexico and Saudi Arabia, also indicated a willingness and ability to help bridge the gap.
Still, crude oil costs had already gone up 25% this year, and many people began to anticipate hikes to unprecedented levels. The jumps in prices over the past several months, of course, had several causes including the recent hurricanes in the Gulf of Mexico, continuing conflicts in the Mid East, and unrest in Nigeria and Venezuela. The current situation layers on still another one—the Prudhoe Bay oil operations.
The nation’s largest oil field, the Prudhoe Bay area provides about 8% of the US daily oil production of 5.1 million barrels a day. By comparison, Texas produces nearly 20% of the national total, more than any other state. The 400,000 barrels per day normally provided from the Prudhoe fields is only about 2% of the US crude consumption, which is approximately 15 million barrels per day. (Total petroleum consumption is around 20.1 million barrels per day.)
Fears of a potential national disaster were relieved when the government noted the possibility of using a portion of the strategic petroleum reserve supplies to temporarily meet the expected needs.
The 688 million barrels of oil that comprise the strategic petroleum reserves are located in underground salt caverns in Texas and Louisiana. There are, of course, no pipelines connecting these reserves with west coast refineries and thus, the loss of output from BP’s Prudhoe Bay field would likely hurt California and the Pacific Northwest the most. So far, according to the US Secretary of Energy, substitutes for the diminished supply of Alaskan oil are available, and no requests to draw from the nation’s reserves have been made.
In addition, various OPEC nations have responded with promises to increase their production levels to meet any shortfalls. The US imports around 58% of the oil it uses, and OPEC, which supplies roughly 55% of the nation’s oil imports, claims it can tap its spare capacity of about two million barrels per day if necessary.
Although most analysts believe the current situation will be relatively short term, interruption of supplies can cause difficulties for industries that are significantly dependent on petroleum, and it could possibly add another nickel or dime at the pump, a definite strain on many pocketbooks.
So, what can we learn from this situation? There are probably several lessons.
The most relevant is the need to formulate policies that would diversify exploration and expand domestic oil production while reducing imports, which often puts money in the hands of unstable or hostile regimes. Another relates to the establishment of procedures for better inspection and maintenance of pipelines.
A third centers around the need for technological and engineering advancements, especially as related to fuel efficient motor vehicles. Closely aligned to it would be the expansion of alternative fuels.
There are many more lessons to be learned, but space prevents me from discussing them. Perhaps in a future column.
Sometimes the nation needs a wake-up call to spur action that leads to improvement. We may have just had one.