TOPICS > Economy

Oil, Gas Prices Rise After Alaskan Oil Pipeline Shutdown

August 8, 2006 at 6:25 PM EDT


MARGARET WARNER: Oil prices have seesawed in the last two days on the B.P. news. Yesterday, oil jumped more than two dollars a barrel. This morning, it soared even higher after an Energy Department report forecast that the affected field wouldn’t resume full production until next February.

But shortly after that, Energy Secretary Bodman and the company made comments about B.P. continuing partial production. That eased prices. And oil prices ended the day slightly lower than yesterday, but still $1.55 higher than the day before.

So where are oil supplies and prices going? For that, we turn to David Pursell, a partner at Pickering Energy Partners in Houston. It’s a research firm that advises mutual funds and other large investors in the energy sector.

Mr. Pursell, welcome. Thank you for joining us.

What is your assessment? What is your take on the economic consequences of this disruption on both oil supply and price?

DAVID PURSELL, Pickering Energy Partners: Based on what we know, our assessment is B.P.’s likely not to have Prudhoe Bay back up and running until at least the end of the year. That’s
400,000 barrels a day offline until let’s just call it January 2007.

Maybe they can do some partial production during that time, but the assessment right now says we’re assuming it’s offline until the end of the year. That takes 2 percent of U.S. consumption offline, 8 percent of U.S. supply.

We can go through all the numbers, but at the end of the day the global oil market is fairly balanced. We have global demand growth that non-OPEC supply is having a tough time meeting. That puts more and more pressure on OPEC. I think it’s pretty clear OPEC doesn’t have a lot of excess production capacity waiting to turn on.

So that when you lose a relatively small amount of oil, like 400,000 barrels a day from Prudhoe Bay, you see the energy market take the oil price up $2 a barrel. Now, this is no different than if you lost half a million barrels a day from Nigeria or Iraq or some of the other areas of the world that we tend to focus on.

MARGARET WARNER: So, in other words, oil really is fungible in a world market sense?

DAVID PURSELL: Absolutely fungible, and it’s a commodity that tends to be pressed on the margins, such that a small supply disruption in a market that’s perceived to be very tight is going to take prices higher, and that’s exactly what we’ve seen with disruptions in Nigeria earlier this year. It’s exactly what we saw with the Alaska shutdown.

A hit on the West Coast

MARGARET WARNER: Now, as I understand it, it's reallyrefineries on the West Coast that depend on this Alaska crude. How dependent are they? Howmuch of a hit will West Coast refineries take?

DAVID PURSELL: The biggest economic hits on the West Coast,all of the million barrels a day of Alaskaproduction goes to the West Coast. They have refineries in Washington Stateand in California.

The West Coast, and if you think about the U.S., the RockyMountains create a physical dividing line such that it's hard to move crude oilfrom the Gulf Coast across the Rockies, so the West Coast is -- to a greatdegree, it's an isolated region.

They consume about 15 percent of U.S. consumption, so it's ameaningful amount. So I think, if you think about where the price impacts aregoing to be, California drivers are going topay a lot more for gasoline and you'll see a bigger increase in gasoline pricesthan we will in Houstonor people will see on the East Coast.

MARGARET WARNER: And just another question about therefineries, though. Where are they going to make it up? Are you saying we'regoing to see great shortages on the West Coast refineries or can they get itelsewhere?

DAVID PURSELL: Great question. I don't think we'll seeshortages. The market's very efficient, and you mentioned earlier crude oil isfungible. Those refineries will source crude from other areas, particularly nearthe Pacific Rim you'll see oil cargoes coming in from Asia.Other Middle Eastern cargoes, instead of coming to the U.S. Gulf Coast, willmove to the other direction and supply Asia,as well.

So you'll see crude oil being moved farther on tankers. It'sgoing to cost more because people are scrambling to supply the system. Whatyou've had is the same number of -- the same amount of demand looking for alittle bit less supply. So the logistical system kind of resets itself, andprices move to a higher level.

MARGARET WARNER: All right. So if oil, though, is fungible,and in fact you're saying the system will somehow find a way to move oil,crude, to the West Coast, then why will California drivers be paying more fortheir gasoline, for one of the products of these refineries, than, say, inHouston or the East Coast?

DAVID PURSELL: Because the West Coast, in essence, is nowcrude short. There's not enough crude oil given the demand. Those refineriesare going to have to pay more to get crude into the West Coast. And a barrel ofoil, once it's refined, 50 percent of a barrel of oil becomes gasoline. So thecrude oil is the raw material for gasoline, and if the raw material cost goesup, that's quickly passed onto the end user.

Alleviating worries

MARGARET WARNER: Now, the energy secretary, Samuel Bodman,said today: Well, I think we're actually in pretty good shape. He said that theinventories were higher than they had been last year. He talked about gettingsome more from Saudi Arabia,from Mexico.Do you agree?

DAVID PURSELL: Well, I think it's his job to kind of wavethe flag and say, "Remain calm; all is well." And I don't think we'regoing to run out, but I also don't think -- I think you have to look at amarket that's pretty tight. I don't think we're going to get more oil from Mexico.Mexico'sproduction is on a well-understood decline.

You know, Saudi Arabia might be able to put more crude oilon the market, and that's probably the last place in the world that has asignificant amount of excess capacity. So I don't think it's time to panic andgo fill your tank, but I also think you have to be very careful we're one moresupply or two more small supply disruptions away from maybe being net short.

MARGARET WARNER: So take your forecasting crystal ball andtell me, how much more will gasoline cost on the West Coast than it did twodays ago?

DAVID PURSELL: I think, if Prudhoe Bayis offline for the end of the year and there isn't a mechanism to have apartial production while they're fixing the pipelines, I think you could easilypay 15 to 20 cents a gallon more for gasoline.

MARGARET WARNER: And how about elsewhere in the country?

DAVID PURSELL: That's probably 10 to 15 cents a gallon. That'smy crystal ball.

MARGARET WARNER: We'll come back and check with you on that.And then what about other products, home heating oil, jet fuel, propane?

DAVID PURSELL: Yes, I think, if you're in the East Coast,don't worry about your heating oil bill. There's not very much heating oilproduced in West Coast refineries that makes it over to the East Coast, and theheating oil market is predominantly a northeastern-based market. It will havean impact on some of the other products, like diesel fuel and jet fuel.

MARGARET WARNER: All right. Mr. Pursell from Houston, thankyou so much.