What a Kink in the Pipeline Does at the Pump

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A section of an oil transit pipeline near the Prudhoe Bay oil field on Alaska's North Slope, which sprang a leak in March 2006

The price of oil jumped $2 a barrel on Monday, past its record $77 close, on word that British driller BP would shut down its field at Alaska's Prudhoe Bay because of corroded, leaky pipes. Immediately, analysts predicted a 3- to 5-cent spike in the price of gasoline, and a ripple effect that could push up prices on everything from airline tickets to petroleum products like plastics. Ten years ago, the markets would have hardly batted an eyelash at the loss of Prudhoe Bay, which accounts for less than 2% of daily U.S. oil consumption. But with production and refining not nearly keeping up with worldwide demand, these days every drop of oil is instantly snapped up, leaving little cushion. "It used to be when something went wrong, prices would move by pennies, nickels and dimes," says Larry Goldstein, president of the Petroleum Industry Research Foundation in New York. "Today, when something goes wrong, the price moves by dollars."

The booming economies of China and India are often credited with vacuuming up the world's oil, though American motorists are still high on any petroleum producer's list of best customers, with the run-up in pump prices hardly having made a dent in the summer driving season. As demand has surged, supply has not kept pace (hence higher prices), largely because not enough extra production and refining facilities have come online. That gap makes the market especially sensitive to any loss of supply, even the relatively modest 400,000 barrels a day that came from Prudhoe Bay.

OPEC, the energy cartel that supplies a quarter of the oil consumed in the U.S., said it will sell more to make up for the Alaska shortfall, and the Department of Energy is figuring out if the government should tap its strategic reserves, which would start to kick in within a day or two. But those promises did little to allay oil traders, who frantically anticipate other potential supply disruptions in geopolitically strained locales from Nigeria to Venezuela to Iran. "We have problems all over the place," says Phil Flynn, senior market analyst and vice president at Alaron Trading in Chicago. "What happens when we have the next outage?"

The issues with Prudhoe's pipes are not new: a leak in March prompted the US Department of Transportation to order BP to improve its corrosion inspections. Nonetheless, Alaska's oilfields — far from war in the Middle East and hurricanes in the Gulf of Mexico — seemed slightly sheltered from turmoil. No more. "It's turning out to be bigger than people thought," says Flynn. "It reminds us how thin the line is between supply and demand."