More pain at the pump?
August 7, 2006 6:51 PM   Subscribe

Prudhoe Bay oil production shut down. A large percentage of the largest major oil field in the US will be shut down, possibly for months, on news that the transfer pipelines which move the oil to the main Trans-Alaska Pipeline are badly corroded. [more inside...]
posted by zoogleplex (39 comments total)

 
Some 400,000 barrels per day of high-quality crude - about 8% - will be subtracted from our domestic production, a loss of about 2% of our total daily consumption, a bit less than half the maximum impact of Katrina. Doesn't seem like that much, but the bad news is that most of the Alaskan oil goes to US West Coast refineries - which could mean serious shortages in California, Oregon and Washington State until (and unlesss) supply lines can be rerouted.

These smart folks think this is pretty bad news.

Note that calling for drilling in the ANWR probably won't help, since it would take too long to ramp up, and besides it would probably have to use the same pipelines.
posted by zoogleplex at 6:57 PM on August 7, 2006


*sigh* And to think my mom gave up trying to make money on oil stocks a couple months ago.
posted by delmoi at 6:59 PM on August 7, 2006


*Put buy options on oil just a few days ago, dances on the dollars of the working class*

I feel like lighting a cigar made of pandas and dodo eggs. Perhaps walk around with a felt top hat. Now I just feel guilty.
posted by geoff. at 7:10 PM on August 7, 2006 [1 favorite]


Maybe they can fix the holes in the pipeline by plugging them with some of that unholy amount of money they made earlier this year.
posted by marxchivist at 7:10 PM on August 7, 2006


geoff: and hurricane season is just getting going. I applaud you for your mercenary cynicism. If I had money, I'd have done the same. What kind of return are you getting?
posted by empath at 7:36 PM on August 7, 2006




loving life
posted by StrasbourgSecaucus at 7:41 PM on August 7, 2006


Any excuse to raise prices to consumers beyond what a free and fair energy market would otherwise tolerate. There's something to be said for binding energy corporations so tightly to administration policy — if you're a shareholder, anyway.
posted by Blazecock Pileon at 8:01 PM on August 7, 2006


This is significant, but it's not the worst thing that's happened this year to oil production. The problems in Nigeria, for example, have had a larger effect. The market reaction was pretty tame, it wasn't all that far beyond the usual daily volatility we've been seeing lately. Similar one-day moves in the nymex contract everyone looks at happen every month or two.

EIA is quoted as saying shortages of gasoline are unlikely: "Lidderdale said refiners on the West Coast, where most of Alaska's crude oil is shipped, have plenty of supply as the region's oil stocks are 'above average' at 55 million barrels."

If the pipeline really is down for months, then as someone on ToD said, it will be interesting to see if Saudi Arabia increases their production at all in response. See if they still have what it takes to be called the "swing" producer.
posted by sfenders at 8:06 PM on August 7, 2006


It's a shame they don't have money enough to perform preventative maintenance on the pipeline.
posted by boo_radley at 8:19 PM on August 7, 2006


"Bump at the Pump" was pretty much the lead story on the local news, with the usual stupid fat hobbitses doing the usual bitching. At least they were honest enough to point out that the increase will be basically less than a cup of coffee per fill-up unless you're driving a semi. Here in the heart of darkest America, land of the big dumb white people with Chevy Suburbans, I'm enjoying driving a little spitkit four-banger in which I refuse to run the A/C because I think sweating is healthier.
posted by pax digita at 8:19 PM on August 7, 2006


As a matter of National Security, I sure hope that somebody decides to throw tax dollars at some company that's very experienced at oil pipeline infrastructure maintenance.
posted by swell at 8:25 PM on August 7, 2006


Yep... I can see it now... the Alaska Oil Movement Freedom Act. ($4.2 billion) You're for freedom, right?
posted by hodyoaten at 8:38 PM on August 7, 2006


A few years ago there were widespread power outages.
It was blamed on aged infrastructure. I assume that this oil leak is the same thing. What has been done? What is in the planning to be done?
Not a god damn thing. It gets in the way of profits..You know the ones.. The record setting profits that top any profits that any company has yet made on the planet to date.

I bet they let this leak bring down oil production for at least a year until people get used to $7 a gallon gasoline.
posted by Balisong at 8:42 PM on August 7, 2006


Sure... corroded pipes. I can only imagine that next quarter's earnings for BP will be the highest ever, once again. If these oil companies don't take it easy with the price hikes, Americans might actually bother to do something about it. People might get off their asses and vote the politicians living off the oil lobby's contributions out of office. But, probably not.
posted by Titania at 8:55 PM on August 7, 2006


Aging infrastructure is just not sexy enough to screw up the current or next business quarter fixing, and in America, it's all about the current and next quarter.

In China, I'm told, it's all about the current and next decade, and I'm starting to think maybe Mandarin or Cantonese ought to be my next language.
posted by pax digita at 9:00 PM on August 7, 2006


In China, I'm told, it's all about the current and next decade.

What??? That's even more extreme than the Five Year Plan! Goddamn communists. Why do they hate freedom so much?
posted by Jimbob at 9:15 PM on August 7, 2006


Why do they hate freedom so much?

They don't plan all their programs around the next election cycle.
posted by Balisong at 9:18 PM on August 7, 2006


They don't plan all their programs around the next election cycle.
posted by Balisong at 12:18 AM EST on August 8 [+] [!]


That's because they don't have elections.
posted by Pastabagel at 9:26 PM on August 7, 2006


Suck it Hummer drivers. Hundred dollar fill-ups, yeah.
posted by caddis at 9:32 PM on August 7, 2006


Exactly. They are free to plan things 5, 10, 30 years down the road, and know those pesky Li'bruls won't get in the way to block funding, or bring a lawsuit, or air disinformation campaigns, or have labor unions arguing for higher wages, or have enviros screaming about what impact it will have on the grey spotted squirels.

Bush just wants to level the playing field so we can compete.
To bring us down to their level, so to speak.
posted by Balisong at 9:39 PM on August 7, 2006


Suck it Hummer drivers. Hundred dollar fill-ups, yeah.
posted by caddis at 12:32 AM EST on August 8 [+] [!]


Again, only about 40,000 Hummers are sold a year out of nearly 16 million total cars, trucks, and SUVs. And I'm guessing people who buy Hummers can probably absorb the 3% increase in oil prices caused by this.

You want to see oil prices go up? Watch what happens if the UN imposes sanctions on Iran at the end of the month.

And all you oil company detractors can put your money where your mouth is:

USO - a tracking stock that tracks crude oil
VDE - exchange traded fund that owns every oil company worth talking about.
FXI - exchange traded fund that owns stock in the largest companies in China.
posted by Pastabagel at 9:42 PM on August 7, 2006 [1 favorite]


There is no data available for USO.
VDE and FXI have "listings" but are meaningless without context.
posted by Balisong at 9:52 PM on August 7, 2006


Back in April of this year, the PBS Series American Experience originally aired its program "The Alaska Pipeline" which was a good overview of the construction process, and what the pipeline means to the people of Alaska, and to the lower 48. The Web site for the program is an excellent resource for those interested in the problems that have caused the shutdown, and the issues surrounding replacement and continued operation of the pipeline and the Prudhoe Bay fields, and it contains some excellent side pieces, including information about pipeline welding, operational pumping, and safety. Even back then, the program noted that maintenance on the pipeline was becoming a constant operational battle, and specifically mentioned corrosion as a concern. This shutdown has been months in the planning.

The welds were a big issue at construction time, and will be a big part of the inspection and repair process going forward. Welds are never as ductile as the base material that they are made on, and this pipe has working for 30 years, in fairly extreme circumstances. From the show's transcript:
"Jimmy Pedigo, pipeline welder: A lot of people can weld, but can you make that perfect weld, every time, every day, 10 hours a day, month after month after month? It would be like penmanship. You've got a lot of people that can write real pretty. And then some people can't; they can just write to get by. That's, that's the difference. To make a good pipeline welder you've got to have that penmanship.

Pete Hughes, pipeline welder: The quality of the work and welding was better on this job than any other job I been on. It had to be. It was inspected more, and they expected more of you. It was publicized; it was a big thing, and everybody was looking down your throat.

Narrator: 798ers were notorious, not only for their skill, but for their attitude. They were the highest paid and most demanding workers on the job.

Bill Howitt: The stories preceded them: very, very talented, very, very arrogant, insisted on their own way... 798ers knew they were good. They knew that we couldn't build this thing without them, and they pushed it a little bit.

Jimmy Pedigo: "Prima donnas" in Alaska; that was a word they used a lot. I know there was a saying up there that happiness was an Okie flying south with a Texan under each arm. So I guess they was referring to, to us, you know.

The welders controlled the pace of work, so whatever they wanted, they got. Winter was coming, and Frank Moolin knew that staying on schedule would get harder as the temperature dropped.

Frank Moolin: You know, Alaska's got some of the worst environmental and weather conditions in the world. It's not unusual to get down to minus 45, minus 50, minus 60 degrees in the wintertime.

Narrator With a little luck, they could work into December before the conditions became impossible.
And:
"Early in 1976 the national media reported that thousands of welds made in the previous year might be fatally flawed.

Walter Cronkite (archival): The Transportation Department, which sets safety standards for all pipelines, opens new hearings tomorrow on the trouble-plagued Alaska Pipeline. Those troubles threaten the fragile Alaskan environment, the timetable for delivering oil to the rest of the country, and the price of that oil.

Narrator: Every one of the 108,000 pipeline welds was supposed to be x-rayed, inspected for flaws, and certified... an enormous task that quickly overwhelmed the companies hired to do the job.

Bill Fowler: One of the subcontractors got behind and pulled a trick that had been learned in the industry long before, is that you find a good weld and you x-ray it 10 or 15 times from a different angle and then call it ten or fifteen different x-rays and then say, well, the next 15 joints are in good shape, now we can move ahead and you get caught up.

When the deception came to light, it was a major scandal and Congress demanded answers from those in charge.

Bill Howitt: It was disastrous because it threw the whole quality control program and quality assurance program for everything on the pipeline into question. It was like, well, if something as simple as an x-ray, you know, can't get done right, what, what else is buried?

Until Frank Moolin's people could sort out which x-rays had been faked, all 30,800 field welds to-date were under suspicion.

By laboriously crosschecking every x-ray, they were able to find the all the duplicates and narrow the number of suspects to 3955. More than half were in buried pipe, some beneath rivers.

Bill Howitt: You're already schedule driven, you've got every resource stressed, all right, now you're going to go out and dig up hundreds of existing places and x-ray them and re-weld them if you have to. And in the case of several river crossings actually go back in a couple of miles under a river and look at the weld.

Narrator: In the end, some 1900 welds needed minor repair. Another thirty-seven had to be cut out and re-done. It was an expensive and embarrassing setback. But the schedule suffered the most damage.

To get the oil flowing in 1977, they had to finish welding pipe before winter set in at the end of 1976, and that was looking more and more doubtful."
posted by paulsc at 9:54 PM on August 7, 2006


Uh, "798ers" referred to in above transcript selections were the members of Tulsa, Oklahoma pipeline welders union Local 798, who wound up doing most of the pipeline welding.
posted by paulsc at 9:58 PM on August 7, 2006


Aging infrastructure is just not sexy enough to screw up the current or next business quarter fixing, and in America, it's all about the current and next quarter.


It seems the oil companies will find any excuse to fix prices. It is not that the shut down will affect oil supply immediately, but that they tell us it will. They want a reasonable excuse, like Iraq, Katrina and Nigeria, to set prices high. All of these things didn't immediately affect supply, but immediately affected prices.
posted by Titania at 11:48 PM on August 7, 2006


Latest info on USO (United States Oil Fund) if you want to learn some stuff before putting your money where your peak oil is.

[disclosure: I work for seeking alpha as a software engineer, but I don't see any other finance sites with the coverage of USO or oil stocks in general like we have ]
posted by rsanheim at 1:03 AM on August 8, 2006


Another good vehicle for Oil exposure is Deutsche Commodity Index , an ETF run by Deutsche Bank.

It's not a pure Oil play as they also have exposure to Gold and various currencies (Swiss Francs and Euros I believe - prospectus is at home) but I've been happy with it's performance so far.

Unlike Gold, I don't consider Oil a "buy and hold" so I have DBC parked in the IRA and trade in and out.
posted by Mutant at 1:24 AM on August 8, 2006


"It is not that the shut down will affect oil supply immediately, but that they tell us it will."

Good point, there. Sure, they tell us that the oil supply is affected by shutting down a pipeline that was supplying oil, but what evidence do we really have? It's probably some kind of conspiracy.
posted by sfenders at 2:57 AM on August 8, 2006


Looks like there's about 200k BPD of crude sequestered in that Exxon dude's wobbly chin. Of course, that's only half the shortfall, but it's way more accessible than other alternatives (such as ANWR).

Hold still, fella, while the nice man sets up the drill string.
posted by notyou at 6:14 AM on August 8, 2006


I'll see you all in Thunderdome.
posted by i_am_a_Jedi at 7:02 AM on August 8, 2006


There is no data available for USO.
VDE and FXI have "listings" but are meaningless without context.
posted by Balisong at 12:52 AM EST on August 8 [+] [!]


Sorry, the links go to the holdings for each fund. USO has only 1 holding - crude oil.

I fixed the links below:
USO - a tracking stock that tracks crude oil
VDE- exchange traded fund that owns every oil company worth talking about.
FXI - exchange traded fund that owns stock in the largest companies in China.

I don't know what else you need in the way of "context". If you think oil's going up, buy oil. If you think higher oil prices = higher profits, esp. for companies like Halliburton (HAL) buy the VDE fund. If you think China is going to the moon, buy China. It's not rocket science.

A note about commodities - I actually don't like baskets of commodities, because there are invariably groups of commodities that work against each other. If you want commodities, find something focused on copper mining and copper itself. Good copper data here.

With China building cities out of nothing, copper is a good play because those cities need wiring. Think of that huge Three Gorges Dam hydroelectric plant. Where is that electricity going? It's going out on copper wire. LEt me put it to you this way. The value of copper metal has increased so much that a penny from 1982 or earlier is worth more than 2 cents.

Contrast with steel. China has excess steel capacity, and when you add Korea's and Japan's you'll see there so real supply pressure on steel. The same goes for things you mix with steel (or the metals that go into making steel, e.g. nickel, zinc, etc.)

Unlike Gold, I don't consider Oil a "buy and hold" so I have DBC parked in the IRA and trade in and out.
posted by Mutant at 4:24 AM EST on August 8 [+] [!]


Why not? To me, oil is the ultimate buy and hold. Maybe not oil company stocks (high price <> high profits), but oil itself seems a no brainer. Over the next ten years, you don't think crude is going to $100? That's only another 30%. The whole peak oil theory is about the end of cheap oil, and the rise of expensive oil. I'm interested to hear your thoughts
posted by Pastabagel at 7:13 AM on August 8, 2006


"Over the next ten years, you don't think crude is going to $100?"

I was with DB for about a decade, and still get their research (guess some IT guys messed up with I left). Mid 2005 one of their reports mentioned oil touching $100 / barrel in 2006, then, with a high degree of probability trading above $100 in 2007.

I guess I mis-spoke; DBC isn't really a buy and hold, as I can trade in and out. The secular trend in Oil is definitely up, I think it will be choppy on the way, hence the opp for market timing.

I'm long Gold & Sillver physical metal, but by comparison transaction costs are much, much higher than AMEX listed securities such as DBC.

As it is I'll trade out physical metals sometime during Q4 of this year as now I can get exposure to Gold & Silver via ETFs such as GLD and SLV. These vehicles weren't available in 2004 when I established my position in metals.

Thanks for the lead on USO; I hadn't seen this one before and it seems worth a closer look.
posted by Mutant at 7:54 AM on August 8, 2006


People (esp. in this thread) worry too much about their cars and SUVs. If the price goes up just a little, food, clothing, electricity, air travel...all cost more. It's not just a drain on your pocketbook, it's a major drain on the whole economy, at a time when the economy could easily go into a tailspin.

Not handling this properly is Bush's legacy, and one we will surely note in the future.
posted by Kickstart70 at 9:07 AM on August 8, 2006


Big Gas Hike Predicted: "Up to 20-cent gas price hike predicted for California."
posted by kirkaracha at 9:16 AM on August 8, 2006


I will predict here that the preventative maintenance was not done in order to raise the stock's price. Less maintenance = less costs means higher revenue = higher profits and the market just loves this.

Up until the point that the maintenance comes due - which this oil was free of water so they never expected the corrosion to take place. Opps. No matter, the executives cashed out millions a bit ago (most likely) so now they will "manage effectively" out of this problem and make sure in the future it doesn't happen again. (Even though it was caused by them.) No matter, here is your bonus for managing the problem so effectively.

My prediction.
posted by fluffycreature at 9:57 AM on August 8, 2006


pax digita little bunny’s been getting fat on bread and honey.

“...A lot of people can weld, but can you make that perfect weld, every time, every day, 10 hours a day, month after month after month?”

My welds look like bubble gum. The first time - every time. They’ll love me, where do I sign up? (Meh, I’m much better at cutting)

I dunno, it seems we had telecoms under gubbmint control for some time, I think calling the oil industry crucial enough to have more govt. control is reasonable given the broad impact it has on so many other industries. On the other hand the reaction(s) to that could be catastrophic and I couldn’t even guess at how to start.
posted by Smedleyman at 10:16 AM on August 8, 2006


"EIA is quoted as saying shortages of gasoline are unlikely: "Lidderdale said refiners on the West Coast, where most of Alaska's crude oil is shipped, have plenty of supply as the region's oil stocks are 'above average' at 55 million barrels.""

Hmm, well, let's put that in some numerical context. Since the total daily crude consumption for the US West Coast is some 3,144,000 barrels, (source: EIA) 55 million barrels is only some 17 1/2 days worth of total, two and a half weeks, roughly.

Now of course that doesn't mean that in 18 days the refiners will suddenly have zero oil. The numbers I saw on TOD say that some 40% of the oil that comes to West Coast refiners comes from Alaska, so assuming those are reasonably accurate while also assuming that the ratio of stocks in from transport to stocks processed out through the refineries is about 1:1, then starting today the West Coast will see a 12.7% shortfall in input to stocks storage (using 3,144,000 bpd as the "daily stocks" and 400,000 bpd as the shortfall). If they continue refining at the same rate (which is essentially inevitable since demand is constant if not growing), they will draw down those stocks-in-place.

Using the numbers above:

Total West Coast Consumption (bbl/day):

3,144,000



Less crude oil input after Prudhoe Bay shortfall:

2,744,000



= daily stocks drawdown:

400,000



Out of total stocks:

55,000,000



Days to deplete total stocks:

137.5


So in about four and a half months, if that 400,000 BPD isn't back up online or replaced from some other source, those 55 million barrels will be gone. Obviously it's not going to happen exactly like that, as some of that input will be replaced, and I'm simplifying a lot. 137 days doesn't sound so bad, but there's a lot more that goes into it than just raw numbers... it's all about the logistics.

The immediate concern is that in anticipation of possible crude shortages, the price of gasoline is going to jump. It will probably be a bit worse in Washington and Oregon as they use proportionally more of the oil than California. It will be difficult to divert both crude and refined products from other areas of the US, since there are only a very few pipelines, if even more than one, going east to west across the country; the West Coast does most of its own refining from crude either produced locally or brought in via tanker from Valdez or from other countries. We are essentially supply-isolated from the rest of the US - and besides, it ain't like the rest of the US isn't using all the oil it brings in from its own sources!

Even releasing stocks from the Strategic Petroleum Reserve^ will have limited and sluggish effect, because it's located in Texas and Louisiana. The logistics would involve releasing SPR crude to the refineries that are local to it, while diverting crude oil shipments destined for the Gulf Coast area to California, which might require unloading it from the huge ULCC crude tankers into PanaMax ships to transit the Canal to the Pacific - or sending huge tankers either around Cape Horn, or all the way thru the Indian Ocean to approach the Pacific Coast from the other side.

There's going to be a lot of complicated and very expensive juggling going on while BP replaces that 16 miles of pipeline. Anybody want to place bets on whether any other parts of the pipeline are in trouble?

We will indeed see if anyone at all can be a "swing producer," that's for sure. If anybody in OPEC can crank out an extra 400,000 bpd, we'll know shortly.

If not... hang on to your wallets, kids.
posted by zoogleplex at 12:11 PM on August 8, 2006


From kirkaracha's link: "California has adequate supplies of crude, enough to last until oil can be shipped from elsewhere to replace lost barrels from the North Slope, several analysts said. They doubted any price increase would last for long."

The key question here is, where is "elsewhere" that has 400,000 BPD of spare production and shipping capacity? The general consensus is that everyone's pumping flat out, except for places with, shal we say, "political" problems like Nigeria and Iraq. Our own Gulf of Mexico is still running short of what it used to produce before Katrina (which was 1.56 million BPD), by some substantial margin - which for some reason I can't seem to find on the web, darn it.

The thought is that with production and consumption both going flat out, that 400,000 BPD replacement is going to have to come from someone else's allotment of oil - we'll be bidding high enough that other countries will not be able to afford to buy all the oil they currently need, while we get our supply replenished at their expense. Note that in some smaller countries that don't usually register high on our radar like Zimbabwe, and even Indonesia, there are already protests and riots because of fuel shortages.

The article also backs me up on the SPR logistics.
posted by zoogleplex at 12:48 PM on August 8, 2006


More about the logistics difficulties. (via TOD)
posted by zoogleplex at 2:59 PM on August 8, 2006


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