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It looks like there might not be any jump at the pump after all. Pundits have been saying for days that the shutdown of Alaska's Prudhoe Bay oil field will drive up gasoline prices, especially in California. It's a natural assumption: Prudhoe Bay, after all, is the biggest oil field in the U.S. and the biggest source of crude for the West Coast. It accounts for 8% of domestic production at a time when world supplies of crude are unusually tight and prices are at near-record levels.
Amazingly, though, gasoline prices have barely budged. That goes not only for current prices, but also for prices in the forward market for the remainder of 2006, according to experts at Platts, a sister company of BusinessWeek also owned by McGraw-Hill (MHP). Simply put, "The market isn't pricing in a huge supply shortage right now," says David M. Marino, a Platts editor in New York.
SOLID INVENTORY. Here's why: For the moment, West Coast refineries that rely on oil from Alaska's North Slope have plenty of crude on hand to maintain production. Also, some oil supplies can be sent to the West Coast from Colombia, Brazil, Argentina, and, if necessary, the Strategic Petroleum Reserve on the Gulf Coast.
Most importantly, though, traders are betting that BP (BP), which operates Prudhoe Bay, will be able to minimize the disruption as it replaces dangerously corroded pipes. On Aug. 8, Energy Secretary Samuel Bodman said that BP officials told him it might be possible to keep half of the 400,000-barrel-a-day field in operation. A source close to BP told Platts that the company may be able to bring back production in the western half of Prudhoe Bay in "several weeks," while the eastern operating area "could take a month or longer." BP has a 26% stake in the field. Exxon Mobil (XOM) and ConocoPhillips (COP) each have 36% stakes.
The market's optimism may be misplaced, of course. Prices could still shoot up if the problems in Prudhoe Bay turn out to be extremely serious. But for now, anyway, the smart money is betting that there will be little to no impact on retail gasoline prices.
The assumption that prices would jump is so firmly planted in people's minds that it has taken awhile to notice that it hasn't been happening.
Here are the surprising numbers:
Current pump prices. According to AAA's Daily Fuel Gauge Report, regular unleaded was going for $3.20 a gallon in California on Aug. 9. That's actually down from $3.25 a month ago. Prices at the pump usually react rapidly to bad news because gas stations—and the middlemen up the supply chain—set prices on the basis of how much it will cost them to replace what they sell today.
The longer-term outlook. If West Coast prices were expected to head higher because of a crude-supply disruption, you would see it in a widening differential between the price in Los Angeles of what's called CARBOB, the base component of California's special gasoline blend, and the price in New York of a gasoline base called RBOB. But in the swaps market, that differential has increased by only three cents for September and hasn't increased at all for subsequent months, according to Platts' Marino.
Again, things could go sour in a hurry. But for now, it looks like the snafu on the shore of the Arctic Ocean isn't about to wallop drivers in the lower 48.
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