Alaska Pipeline Still Closed, So Why Isn't Oil Higher?

A major pipeline carrying 11 percent of U.S. crude oil production has been shut for three days, and yet U.S. oil prices never even rose to $90 a barrel today. Why aren't oil prices rallying more sharply after the closure of the Alaska pipeline?

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Of course, oil prices usually go up with there is a supply disruption of any kind. The Alyeska Pipeline Company, which operates the Trans-Alaska Pipeline, has no estimate of when operations will restart. Federal and state regulators must review its restart plan, which will likely involve a bypass system, and then that system must be built and installed.

An Alyeska spokeswoman says: "We are working together to get the pipeline safely restarted as quickly as possible given the winter conditions." So, it doesn't sound like the resuming operations will be a quick process.

And, this is not a small disruption. It could have a significant impact on West Coast refineries. North Slope production is being cut by 95 percent. The pipeline transports about 640,000 barrels per day, according to the U.S. Energy Information Administration. About 2.7 million barrels of crude are stored at the Port of Valdez, the final terminal where vessels pick up the pipeline's crude, says energy analyst Andy Lipow. So that terminal could be empty in about four days.

Lipow estimates there are still about 5 million barrels of crude oil on tankers already in transit from Alaska. It is difficult to predict when the last tanker will deliver oil to West Coast refineries, but the refineries have continued operations so far and are not reporting any impact due to the closure.

So, again, why aren't oil prices skyrocketing? West Coast refineries—and West Coast drivers—could see a significant impact if this pipeline shutdown continues. Gasoline prices on the Pacific Northwest are likely to surge, Lipow says.

But the Alaska pipeline closure is similar to a production shut-in from a hurricane in the Gulf of Mexico with one big exception.

"We've lost Alaskan crude oil supply and West Coast refineries are still running, but when there's a hurricane we lose both oil production and hurricane refining capacity," Lipow says. "In both cases, gasoline and diesel prices go up", often more so that crude oil futures, he says.

Still, supply outages in the Gulf Coast can have a more immediate impact on U.S. oil futures due to the transit of crude oil up pipelines from Texas and Louisiana to Cushing, Oklahoma, where the Nymex hub is located, and other points in the Midwest. A key factor muting the U.S. oil price rise from the pipeline outage is the lack of proximity of Alaskan crude to the key delivery point for the Nymex crude futures.

"It's completely dislocated from the key delivery point of the Nymex crude contract," Lipow says.

And, U.S. oil prices finish up just 1 percenton the third day of the pipeline closure.