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| Originally Aired: August 8, 2006 |
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Oil, Gas Prices Rise After Alaskan Oil Pipeline Shutdown |
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| The shutdown of pipelines in the Prudhoe Bay oil field in Alaska is expected to heavily impact oil and gasoline prices. An oil markets analyst discusses the economic consequences. |
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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.
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A hit on the West Coast
MARGARET WARNER: Now, as I understand it, it's really
refineries on the West Coast that depend on this Alaska crude. How dependent are they? How
much 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 Alaska
production goes to the West Coast. They have refineries in Washington State
and in California.
The West Coast, and if you think about the U.S., the Rocky
Mountains create a physical dividing line such that it's hard to move crude oil
from the Gulf Coast across the Rockies, so the West Coast is -- to a great
degree, it's an isolated region.
They consume about 15 percent of U.S. consumption, so it's a
meaningful amount. So I think, if you think about where the price impacts are
going to be, California drivers are going to
pay a lot more for gasoline and you'll see a bigger increase in gasoline prices
than we will in Houston
or people will see on the East Coast.
MARGARET WARNER: And just another question about the
refineries, though. Where are they going to make it up? Are you saying we're
going to see great shortages on the West Coast refineries or can they get it
elsewhere?
DAVID PURSELL: Great question. I don't think we'll see
shortages. The market's very efficient, and you mentioned earlier crude oil is
fungible. Those refineries will source crude from other areas, particularly near
the Pacific Rim you'll see oil cargoes coming in from Asia.
Other Middle Eastern cargoes, instead of coming to the U.S. Gulf Coast, will
move to the other direction and supply Asia,
as well.
So you'll see crude oil being moved farther on tankers. It's
going to cost more because people are scrambling to supply the system. What
you've had is the same number of -- the same amount of demand looking for a
little bit less supply. So the logistical system kind of resets itself, and
prices 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 for
their gasoline, for one of the products of these refineries, than, say, in
Houston or the East Coast?
DAVID PURSELL: Because the West Coast, in essence, is now
crude short. There's not enough crude oil given the demand. Those refineries
are going to have to pay more to get crude into the West Coast. And a barrel of
oil, once it's refined, 50 percent of a barrel of oil becomes gasoline. So the
crude oil is the raw material for gasoline, and if the raw material cost goes
up, that's quickly passed onto the end user.
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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 the
inventories were higher than they had been last year. He talked about getting
some more from Saudi Arabia,
from Mexico.
Do you agree?
DAVID PURSELL: Well, I think it's his job to kind of wave
the flag and say, "Remain calm; all is well." And I don't think we're
going to run out, but I also don't think -- I think you have to look at a
market that's pretty tight. I don't think we're going to get more oil from Mexico.
Mexico's
production is on a well-understood decline.
You know, Saudi
Arabia might be able to put more crude oil
on the market, and that's probably the last place in the world that has a
significant amount of excess capacity. So I don't think it's time to panic and
go fill your tank, but I also think you have to be very careful we're one more
supply or two more small supply disruptions away from maybe being net short.
MARGARET WARNER: So take your forecasting crystal ball and
tell me, how much more will gasoline cost on the West Coast than it did two
days ago?
DAVID PURSELL: I think, if Prudhoe Bay
is offline for the end of the year and there isn't a mechanism to have a
partial production while they're fixing the pipelines, I think you could easily
pay 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's
my 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 oil
produced in West Coast refineries that makes it over to the East Coast, and the
heating oil market is predominantly a northeastern-based market. It will have
an impact on some of the other products, like diesel fuel and jet fuel.
MARGARET WARNER: All right. Mr. Pursell from Houston, thank
you so much.
DAVID PURSELL: Thank you.
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