Oil Prices Turn For The Better

Two weeks after the Prudhoe Bay leak had manufacturers staring at surging oil prices, the market has calmed down. It's fragile relief, but it is relief.

It’s been nearly two weeks since British Petroleum shocked the energy markets – and the world – by saying it was shutting down the Prudhoe Bay oilfield, the largest in the United States, because of a small leak in one of its pipelines.

The announcement was played up by the mainstream media as a blow to strapped American consumers, but to the manufacturing industry, already hammered by high energy costs, it was also another punch in the gut. (A recent survey conducted by Manufacturing.net showed that energy costs are one of the biggest negative issues impacting manufacturers today.)

As word of the shutdown spread and fears of a supply shortage escalated, the price of crude oil surged, settling at nearly $77 a barrel on Aug. 7. Talk of $80 oil was commonplace, and $100 was on the table.

But fast forward to today and the energy backdrop for manufacturers doesn’t look quite as daunting, at least on a near-term basis. The price of crude, down another dollar to $70.90 Thursday, has pulled back nearly 10 percent from two weeks ago, and the talk in some circles has turned to an excess supply of oil. On Wednesday, the U.S. Energy Department said crude oil inventories are well above what is typical for this time of the year, at 331 million barrels.

BP said last week it would keep part of the field open after reviewing the results of additional ultrasound inspections. BP initially believed the entire pipeline in Prudhoe Bay would need to be shut down, but determined that only the Eastern Operating Area needed to be taken down in preparation for the replacement of approximately 16 miles of pipeline.

According to BP spokesman Scott Dean, the pipeline in the oil field is the original pipe from 1977.  He said BP will not provide a time estimate to restart operations.

“It (the field) will be down as long as it takes,” Dean said. “Our focus is on the safe and reliable operation of the field.”

As for the affected pipeline, Federal On-Scene Coordinator for the EPA, Matt Carr, said the cleanup is going “very well.”

Patches were applied to the leak points and catch basins are in place to prevent further oil releases to the tundra. The next step will be to apply clamps which will provide a higher level of leak protection. Over the weekend, spill responders flooded areas of the spill in an attempt to float additional oil for removal. A decision was made to vacuum up the remaining fluids at the spill site and burn the remaining oil off the tundra. Burning is used by use of weed-burners applied to the spill area to remove all oiled tundra grasses.

BP has sourced replacement pipe from suppliers in Texas and Ohio and expects to begin replacement in the fourth quarter. “BP is committed to replace that pipe,” Carr said. “It will take months, if not longer than that.”

BP has been cited in the past for unauthorized oil releases, detection system lapses and safety violations.

“There have been different operators of the field over the last 30 years,” Carr said. “BP inherited predecessors’ procedures and problems.”

(BP shareholders earlier this week filed suit against BP’s senior management, alleging poor maintenance practices at Prudhoe Bay led to the partial shutdown.)

Of course, just as the spike in oil prices following the Prudhoe Bay news was short-lived, so, too, could be the pullback. Easing tensions in the Middle East, which have also served to dampen oil prices, could reverse on a moment’s notice.

UBS economist Jan Stuart pointed out in a recent report on the global oil situation that the pipeline issues in Alaska raise troubling questions about ageing infrastructure in mature oil spots around the world, including Canada and Russia.

“More new developments are delayed than are on time, and further risks remain large,” Stuart said.

Even at Prudhoe, a couple of mishaps since the discovery of the main leak have been an issue, including last Thursday, when a drilling rig’s tires sank in a soft spot and the rig started tilting towards a pipeline.

“The summer up here is around 48 degrees,” said Carr. “It is a flat coastal plane that is very marshy. The challenge to spill responders is that everything becomes mobile. It was a fortunate thing that this is a small spill.”

Fortunate, indeed, for manufacturers who are having a difficult time passing on their higher energy costs to their customers. The price of oil is a volatile beast, and while this brief retreat surely doesn't indicate a long-term trend, compared with the environment of two weeks ago manufacturers have to be feeling more optimistic about their energy expenses.

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