Alaska Oil Shutdown Constrains Already Tight Supply

The shutdown of a BP oil pipeline in Alaska sends oil prices rising, and may have a direct impact on California. Alaska supplies close to 20 percent of the oil produced by California's refineries. Renee Montagne talks to Frank Wolak, a professor of economics at Stanford University, about the shutdown's likely effects.

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RENEE MONTAGNE, Host:

And nowhere might drivers be more eager to have Prudhoe Bay oil flowing again that those here in California. This state doesn't rely as much on Alaskan oil as it once did. Still, Alaska supplies about 20 percent of the oil pumped by California refineries. And Alaska's daily oil production will be cut in half when BP shuts down its corroded pipelines. At a San Francisco gas station yesterday, John Wall(ph) said higher prices would change his driving habits.

JOHN WALL: Nothing much I can do about it, just drive less. Sure make me conserve, I'll tell you that.

MONTAGNE: For motorist Richard Suarez, the BP shutdown is just the latest incident to cause prices to go up.

RICHARD SUAREZ: I may the comment back in 1950, when gas goes up to 28 cents, I'll quit driving and start walking. That's how stupid I was.

MONTAGNE: For more on how the BP shutdown will affect the West Coast, we're joined now by Frank Wolak. He's a professor of economics at Stanford University, and is on the line from Palo Alto.

Thanks for joining us.

FRANK WOLAK: Sure.

MONTAGNE: Just how big of an impact are we talking about for California here?

WOLAK: Fortunately, this is a really a very small fraction of the world oil supply. So the real question is how much will this disruption be replaced by other sources of supply - is a major factor determining how much the price will increase.

MONTAGNE: And will that affect everyday drivers in this state, do you think, or have an impact on the economy?

WOLAK: Well, the most pessimistic kind of price increases would be on the order of about a four to $5 per barrel price increase as a result of this disruption. That's, you know, sort of in the range of gasoline price increases we've been seeing lately. That's not going to translate into, you know, too large of a price increase.

I think the bigger issue is how they'll deal with the public relations problem of, you know, disrupting a large source of domestic supply for Alaska. I mean, it's a significant fraction of revenues to the state of Alaska. I think that's the biggest issue.

MONTAGNE: If it's a public relations problem, what are the options - aside from fixing it?

(SOUNDBITE OF LAUGHTER)

WOLAK: Well, that's pretty much it. But in terms of big impact for California - unfortunately, California is very import dependent and oil is fairly a homogeneous product. So the big question is just where will the oil that isn't coming from Alaska now come from, and how fast can it be - can it get here?

MONTAGNE: So where will it come from? I mean, this Prudhoe Bay shutdown comes amid disruptions in Nigeria, Iraq, Venezuela, the Gulf of Mexico.

WOLAK: Well, fortunately, this is roughly about a half a percent of world oil production. And there certainly is sufficient - if you like - excess capacity in terms of the production, particularly in a number of the Middle East countries that could, you know, make up that slack. There's also the Strategic Petroleum Reserve, which contains roughly 700 million barrels. And so if the United States decided to tap into that, that could certainly, you know, mitigate any of these kinds of price increases.

MONTAGNE: Well, the Energy Department says it might open the Strategic Petroleum Reserve. What effect would that have? And now, really - not just to California, but nationally?

WOLAK: It would certainly work against any sort of price increase by simply increasing the amount of oil that's available. And it makes a lot of sense to tap on the reserve at the moment, because certainly this is probably the highest prices will be. But if, you know, the thought is that further disruptions are likely, then it may not be the best time to tap.

MONTAGNE: Does the fact that the government is considering opening the Strategic Petroleum Reserve show that this is pretty serious?

WOLAK: I think it's more of the appropriate response to manage - if you like - market expectations. It's that it would probably be not the best for prices if the government says nope, we're not going to even consider tapping the Strategic Petroleum Reserve. You might trigger some sort of further response in terms of storage of oil and the like to further raise prices.

So just simply the talking down the price is just saying that you'll consider it, and hopefully that's going to calm the nerves of the oil traders to prevent the price from rising further.

MONTAGNE: Thank you very much for joining us.

WOLAK: Okay.

MONTAGNE: Frank Wolak is a professor of economics at Stanford University, speaking to us from Palo Alto.

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