Aug 8, 2006 5 min read

NEW YORK (AP) – Crude oil prices jumped more than $2 a barrel Monday after an Alaskan oil field shut down, blocking 8 percent of daily U.S. oil production. Gasoline futures also rose, and experts are expecting prices at the pump to increase by about 10 cents a gallon.

BP Exploration Alaska Inc. began shutting down 400,000 barrels of daily oil production Sunday at Prudhoe Bay, in Alaska’s North Slope region, because of severe corrosion on a pipeline.

While BP officials said it will take weeks or months to restore lost production.

About 90 percent of the Alaskan production serves refineries on the West Coast, said Fimat USA analyst John Kilduff, and that region will see the most substantial price increases.

The most recent tally of crude oil inventories on the West coast was 55.5 million barrels, well above last year’s levels. If those stocks become low, though, refiners would need to get additional crude oil shipped from the Gulf Coast, and perhaps Asia. The U.S. government said Monday it would offer oil from its Strategic Petroleum Reserve, which has about 700 million barrels in storage on the Gulf Coast, if requested.

The average U.S. retail price of a gallon of unleaded, regular gasoline was $3.036 on Monday – near its all-time high of $3.057, reached Sept. 5 after Hurricane Katrina hit the Gulf Coast.

“I suspect that record will fall in the next 48 hours,” said Tom Kloza, an analyst at Oil Price Information Service in Wall, N.J., on Monday. He noted that pump prices around the country are likely to rise 5 to 10 cents a gallon.

In March, a BP transit line in the North Slope spilled 267,000 gallons of oil. It was a month before BP was able to install a bypass on that line to resume operations. BP is currently under criminal investigation for that spill.

“It makes you wonder, if this time the pipeline will be shut down longer than it was in March because inspection will be more stringent,” said Phil Flynn, analyst at Alaron Trading Corp. in Chicago.

Traders are worried that a pattern of BP problems could be emerging; the recent corrosion was only discovered after federal regulators ordered the company to inspect the lines. Besides the pipeline problems, the company, which is the largest oil producer in the United States, last year had a deadly explosion at its Texas City refinery.

“I’ve been telling people, BP stands for big problems,” Flynn said. “If this were their first or second incident, people could say it’s bad luck … but it seems like there’s a systemic problem from top to bottom.”

Light, sweet crude for September delivery on the New York Mercantile Exchange climbed $2.22, or 3 percent, to settle at $76.98 a barrel Monday, after peaking at $77.30 earlier in the day. It was the highest settlement price since July 14, when crude settled at a record $77.03 a barrel.

Brent crude for September on London’s ICE futures exchange rose $2.13 to $78.30 a barrel.

Nymex heating oil futures rose 5.39 cents to settle at $2.1435 a gallon. Gasoline futures rose 2.01 cents to settle at $2.2516 a gallon. Natural gas fell 33.9 cents to settle at $6.907 per 1,000 cubic feet.

BP’s production shutdown adds to the list of supply worries that are currently buoying oil prices: the potential for storms in the Gulf of Mexico, violence in the Middle East and unrest in Nigeria, Africa’s biggest oil producer.

At around 334 million barrels, U.S. crude inventories are at a 5-year high, but OPEC’s spare capacity (which can be added within a month and sustained for 3 months) is tight at around 2 million barrels a day.

On Monday, the violence between Israel and Hezbollah guerrillas in Lebanon neared its fifth week. While diplomatic efforts were intensifying at the United Nations, the fighting continued unabated.

Crude prices rose to a record $78.40 a barrel on July 14 on worries that Iran, OPEC’s No. 2 producer, could cut supplies if it gets involved in the fighting in Lebanon and Israel. Iran is also entrenched in a standoff with the United Nations over its nuclear program, and Iranian officials haven’t ruled out using oil as a bargaining chip.

Meanwhile in Nigeria – Africa’s biggest oil exporter and the fifth-largest supplier of crude to the United States – militant attacks this year have shut down a quarter of the 2.6 million barrels of oil it normally produces each day.

Oil prices are 20 percent higher than a year ago, but still below all-time inflation-adjusted highs of around $90.

Flynn estimated that if the Alaska shutdown lasts for months, crude futures could rise above $80 a barrel.

The shutdown prompted investors to sell stocks on inflation fears, one day before the Federal Reserve’s next decision on interest rates. BP’s U.S. shares fell $2.06, or 2.8 percent, to $70.48 in late afternoon trading Monday on the New York Stock Exchange.

Shares of the BP Prudhoe Bay Royalty Trust, which makes its money from assets in the North Slope, fell about 13 percent by late afternoon Monday.

AP-ES-08-07-06 1630EDT