Alaska Pipeline Shutdown Has Immediate Impact on Oil Prices

BP (BP), ConocoPhillips (COP) and Exxon Mobil (XOM) have cut their oil production from Alaska's Prudhoe Bay field by 95% after a leak was discovered in the Trans-Alaska Pipeline. No one is certain how long the leak will take to fix. It appears to be in a concrete casing along the pipeline at the North Slope pumping station. Alyeska Pipeline Service, the partnership among the oil firms that handles the pipeline's operation, made the announcement over the weekend.

The news sent crude oil prices higher by over 2% to nearly $90. Traders are concerned because the pipeline carries about 15% of U.S. oil output.

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It's not clear whether the leak will have an immediate impact on U.S. crude reserves, which may be large enough to offset any loss of oil from the North Slope -- for now.

The Alaska Pipeline is rarely mentioned as a factor that affects the price of oil. Recent debate has centered on increased demand in rapidly growing nations like China and the refusal of OPEC to raise output. Crude prices can also be impacted by weather, especially in the Gulf of Mexico, which is sometimes plagued by hurricanes. But the hurricane season has already come and gone. Political instability in some large oil-producing nations is a more acute issue. Iraq, Iran, Venezuela, and Nigeria are among the ten largest oil producers in the world based on reserves. Rebels in Nigeria have disrupted oil operations in that country, and the political situation in the other countries is constantly open to question.

A pipeline break may raise crude prices, but it also shows how unpredictable events can quickly change perceptions of oil supply and demand.