Regional Oil Shock?

[LA_Renter]

“(08-07) 10:46 PDT — Sunday’s shut-down of a major Alaskan oil field will likely push California’s gasoline prices higher.

California depends heavily on crude from the North Slope, including the Prudhoe Bay field that oil giant BP decided to close after finding serious pipeline corrosion.

Alaska supplies roughly 20 percent of all the oil used in California refineries, with the rest coming either from the state’s own oil fields or from abroad. The shut-down, effective until BP can fully assess and repair damage to its pipeline, will cut North Slope oil exports in half.

California’s gasoline prices have been stable for several weeks, stuck just above $3.20 for a gallon of regular. The sudden pinch in oil supplies threatens to change that.

“Throughout the course of the month, you’ll see refineries have to cut runs, which is going to yield less gasoline, less diesel, less jet fuel,” said Denton Cinquegrana, West Coast markets editor with the Oil Price Information Service.”

This warrants watching, Southern California home sales are basically plummeting. If this oil field is shut down for a prolonged period it could possibly be the pin that REALLY pops the bubble in CA. It is still very early to determine what the impact will be but this is the last thing CA needed right now.

[SD Realtor]

Yeah a friend of mine who has fairly significant investments in domestic small wells called me last night on this topic. He said it is approximately 16 miles of pipeline. There is no word on the accessibility of the segments that need repair. If the accessibility is tough that could prolong the repair time significantly.

Of course BP actually has 3 pipelines up there and the other 2 are undergoing repairs right now… Well imagine that!

Let’s keep our fingers crossed for calm weather in the gulf as having a hurricane roll through there would not help oil prices…

[LA_Renter]

I brought this up because I was reading exactly how much total RE $ transactions are down in So Cal, and the whole state for that matter. Home sales were down about 35% to 40% in July. There are pockets in LA that are down 80%. Thats a pretty big contraction to one of the states largest employers which is RE. Their are alot of hungry realtors, mtg brokers, etc out there. According to the UCLA Anderson forecast it takes about 4 to 6 quarters for this contraction to be felt in the economy. Now you throw a potential oil shock on top of this which is both contractionary and inflationary. When I discovered this BP fiasco would hit the west coast the hardest my gut reaction was Wow! that could really be the straw that broke the camels back. Right now they are saying this could take months to fix. This could fade into a no big deal story or this may be the tip of the iceberg. I guess we need more info. If its a real big problem than IMO it plays directly into the busting of this RE bubble.

[lindismith]

I think you’re right LA_Renter. Everything keeps going up and up because of the cost of oil. I’m in manufacturing, and everything is affected. I’m getting ready to tell my two biggest customers to expect an increase.

Question: how come corrosion of pipes wasn’t noticed earlier? And how come the supply has to completely stop? Aren’t there contingencey plans in place? Or do big oil companies making big bucks not care if production goes down for a while? Corrosion takes ages to form. Wouldn’t field inspectors notice corrosion before it got to a point that the whole spigot has to be turned off?

It’s almost like CA is being tested to see how much shock we can absorb to our economic system. Based on how we do, they can roll out higher oil prices to the rest of the country. Geez, I’m getting so cynical.

[VCJIM]

Lindi,

I’ve watched a bunch of the Discovery Channel type shows on the Alaska pipelines; they are amazing and were incredibly difficult to build. Much like Hoover Dam, whole cities were created around them. Anyway, because I’m now an expert after watching those shows, it seems that there are very remote and difficult areas to access. While I agree it should be MANDATORY to inspect, it *may* have been practically impossible.

[speedingpullet]

lindismith? Cynical? Non! 😉

Watching CNN as much as I do, every day during the ‘gas prices across the US’ section, CA is consistently red – the highest.
We’ve been hovvering around the $3 a gallon mark for weeks. Crude oil closed today a mere 5 cents off the all-time high in July 14th.

i’m wondering myself how this will affect the price of everything, RE included.

[lindismith]

speeding – love your posts!

Ok, VCJIM, we’re both in business. Don’t you know what’s going on with all your equipment at all times? And, don’t you make contingency plans based on orders so you can fulfill?

If they can build the line in the first place, surely they can get to it to inspect it. A maintainence schedule is part of any operation. Surely.

Plus, I’m no chemist, but isn’t corosion a given aspect of metal pipes? Isn’t there some kind of time period that you’d expect a pipe to last? Sort of like cars in the midwest. You know they’re not going to survive that many winters, so you save up to buy a new one, based on common sense, and experience. BP pays a lot of people to apply their experience and common sense. They all dropped the ball?

It’s late in the day. I’m so irritated by this oil news. The bottom line is I’m worried my big customers will say to me, ‘well, let’s just start producing offshore.’ They can go thru me, but they might just go direct themselves.

Ugh.

[VCJIM]

From what I remember, they blasted holes through mountains and ran the pipe through. Kinda difficult to inspect, I would think. However, there are certainly methods, such as “how much oil did we pump in, and how much came out the other side?”. But given the vast distances and volumes, leaks could be difficult to detect. A decent size leak doesn’t mean there is a small hole, it likely means a large section has corroded.

I’m not defending them, just recounting what I saw.

To answer your question, if certain pieces of my test equipment fail, I’m dead in the water until they’re fixed.

[rankandfile]

They are fully aware that they SHOULD have been on a routine maintenance and repair cycle. Yes, maybe inspections are difficult, but they should’ve just prepared a replacement plan for the pipes after so many years of service, whether it was corroded or not. This is the proactive way of doing things and it is much less expensive in the long run. Do you personally inspect every shingle in your roof to see if there’s a leak under it? It is simply replaced after it’s typical service life. Same goes for pipes, roads, bridges, etc.

What’s their incentive to spend ongoing funds to maintain these things when they can just let them go to waste, shut down a portion of operations, and charge an arm and a leg for oil while they fix the problem? After all is said and done, I’d bet that it is actually more profitable for them to let the pipes rot and overcharge on oil than to keep them maintained and the oil flowing.

[lindismith]

you are an expert! 🙂

Exactly – volumne of oil going in one end = same vol. of oil coming out the other.

So that’s what makes me think this is either a test, or they are rolling in that much money, that a few thousand missing gallons via a leak, don’t mean a thing.

I think they probably did know they were leaking, but decided they can afford to go down.

[SD Realtor]

From what my oil friend says…

Alot of the problems are and have been known by BP. In this case these particular problems are due to corrosiveness in the pipeline and that there is a threshold before there is a mandatory point of repair. In this particular section for this particular corrosion I believe it was 80%. In other words the corrosiveness level hit 81% thus the policy of BP at that point was to shut it down. There are several steps that are routinely taken for on going maintenance including pumping lots of anticorrosion chemicals through the line to slow down the corrosion process. Additionally they have monitors along the lines, take xrays and other steps for checking the rate of deterioration.

With that said I cannot help but to agree with rankandfiles last paragraph…

[rankandfile]

SD Realtor, thanks for that insight. I figured they had some sort of plan in place…at least on paper. This reminds me of the sewer spills that frequently occur in San Diego. There are preventive maintenance steps, and predictive deterioration models that can be performed to gauge how bad pipes are and when they will need to be replaced. If there is no data for this, a replacement schedule is implemented whereby x feet of pipe are methodically replaced every so often. Other methods include in situ repairs such as re-lining the pipes and filling the voids. The main point is that I don’t think that San Diego can just keep raising the sewer rates to compensate for the deteriorating pipes. Ongoing maintenance and replacement should already be factored into the monthly sewer rates. In other words, the City has a financial incentive to proactively maintain their pipes because letting them go to waste and replacing them is much more expensive. The oil companies, on the other hand, just increase the cost per barrel to offset any lack of foresight on their part.

[bubble_contagion]

12 largest oil fields in the US

Field, State Cumulative Production + Est. Reserves

1. Prudhoe Bay, Alaska 13+ billion barrels
2. East Texas 5.1-6.0 billion barrels
3. Wilmington, California 2.8 billion barrels [or up to 3.0]
4. Midway-Sunset, California 2.8 billion barrels [or up to 3.5]
5. Kuparuk River, Alaska 2.6 billion barrels
6. Thunder Horse, Gulf of Mexico 1.5-2.0 billion barrels
7. Kern River, California 1.95 billion barrels [or up to 2.5]
8. Yates, West Texas 1.95 billion barrels
9. Belridge South, California 1.9 billion barrels
10. Wasson, West Texas 1.8 billion barrels
11. Elk Hills, California 1.5 billion barrels [or 1.3]
12. Panhandle, Texas 1.4 billion barrels

24 largest oil fields in the World Field

Country, Size estimate

1. Ghawar, Saudi Arabia
Saudi fields overall are in decline at 2% to 8% a year. Source 75-83 billion barrels
2. Burgan, Kuwait • in decline 66-72 billion barrels
2a. Cantarell, Mexico • in decline 35 billion barrels OOIP
18 billion recoverable (often listed as a large complex
of multiple smaller fields)

For oil industry info go to:

http://www.gravmag.com/oil.html

I work for a company that makes industrial equipment for big oil. BP and most other oil companies in the world are our customers. Currently we are producing equipment almost at maximum capacity, our suppliers and even our competition are also reaching capacity. The oil industry is ramping up big time and in a few years supply should catch up with demand. When this happens oil prices will come down in price but we are still a few years away.

[powayseller]

bubble_contagion – how is the oil industry ramping up? Drilling new wells? Where? Buying the tools to extract oil from the oil sands? I think the era of cheap oil is over – there is a lot more oil, but it is getting more and more expensive to extract. The oil companies were not extracting it, because the cost of oil was too low for them to recover the cost. Last, what is your perspective on why the oil companies have record profits? Is it as my brother said, namely that they are now able to charge record amounts for their domestic (free) oil wells? So the profit increase is from the domestic portion of their reserves.

[bubble_contagion]

Yes, the US oil companies are charging much more now than just a few years back while their costs have remained the same. This applies to their domestic and international production. The Saudis and Venezuela are doing the same. Venezuela just bought 3 billion dollars of military equipment from Russia. Most of that money came from the US. Cisco is owned by Venezuela. Americans need to support the US oil industry so less oil is imported. The worst that can happen to a country is to have a goverment that is funded by oil and not by the economic progress of it’s citizens (e.g Iran, Libya, Iraq and now Venezuela).

This article details how the oil industry will ramp up:

http://www.washingtonpost.com/wp-dyn/content/article/2005/07/29/AR2005072901672.html

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