Lynne Kiesling
This is a humdinger: BP’s Prudhoe Bay pipeline is possibly corroded and leaking, and will be shut down.
Once the field is shut down, BP said oil production will be reduced by 400,000 barrels a day. That’s close to 8 percent of U.S. oil production or about 2.6 percent of U.S. supply including imports, according to data from the U.S. Energy Information Administration.
As of mid-afternoon Monday, oil prices have risen to over $77. The US Department of Energy is considering a release from the Strategic Petroleum Reserve to help cushion the effect of the supply reduction on oil prices.
Note that this event is unlikely to affect gasoline prices much in the US apart from the effect on oil prices, because much of the production from Prudhoe Bay has been going to Asia.
Still, this is a humdinger. Bad timing too.
UPDATE: Not surprisingly, EconBrowser and Environmental Economics have relevant and informative posts, both providing elasticity calculations of the price elasticity of demand for oil. I think Tim’s EE post overstates the % change in quantity, because the article he cites says that it’s a 2.6% reduction in US supply, not world supply. Thus he overstates the numerator in the elasticity calculation, which leads to the implausible 1.3 that makes him stop and wonder. Jim’s estimate at EB is 0.17, much more plausible.
Just how does a pipeline suddenly become ‘corroded’? The inner surface is coated with oil – a rustproofer. The outer surface is covered with insulation, and hopefully paint. “PIGS” are sent through on a regular basis to inspect for problems such at this. This pipeline is their ‘bread and butter’. How could they let it get into this condition? Didn’t they realize the deleterious effects on profits if it was shut down? What happened, did BP forget their homework?
This is very telling that a corporation does not even maintain its own pipeline.
tom
Tom,
There was a WSJ article today that made essentially the same point, and that said that their share prices are likely to suffer accordingly.
The most important thing to notice is that BP stopped sending “pigs” down the pipeline to look for corrosion in 1992. 1992 was in the middle of the refining drought of 1994-2004, when refinery profits were extremely low. BP was looking to save money any way possible. They did the bare minimum of maintenance.
Now, since 2004, refinery profits have been better (but still not great, % wise). But it takes time to overcome the cheapskate corporate psychology at the refiners. 15 years of hard times can’t be forgotton in one year.
Refiners are genrally very conservative, engineering wise. They don’t take many risks. That BP switched from the pigs to ultrasonic testing on the outside of the pipeline is pretty interesting to me.
BTW, crude oil is not a homogenous substance. There is all kinds of corrosive crap in that pipeline, including water, sulfur, and thus acids.