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Rust Never Sleeps...

Written by Brian Hicks
Posted August 8, 2006

Maybe somebody ought to give the fellas over at British Petroleum (BP) Neil Young's phone number. Had they only known that rust never sleeps, we might have avoided the market shock that sent oil prices to record levels on Monday.

It was rust after all - simple oxidation - that sent oil prices suddenly higher as BP announced that the shut down of the Prudhoe Bay oilfield had begun over the weekend.

But that's when the misery really started.

Company officials revealed that testing of its pipeline found losses in pipe wall thickness of between 70% and 81 %.

This "corrosion- related wall thinning appeared to exceed BP criteria for continued operation," said the company in an effort to explain in the shut down.

The simple translation is this: the pipe was so darned rusty it could have sprung a gusher at any moment.

And apparently it had as workers later discovered 4 or 5 stray barrels of the liquid gold puddled on the frozen tundra.

Later translations only confirmed the markets worst fears. BP went on to comment that the corrosion was so severe that it will have to replace some 16 miles of pipe.

Can you say worst case scenario?

Industry experts are bracing for several months of blocked production at a time when we can least afford it.

But this was just the latest of BP's Alaskan woes. The company made the headlines for all the wrong reasons as recently as last spring.

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BP = Big Problems

It was then that another pipeline problem - also suspected to be related to corrosion - caused the biggest spill in North Slope history. A mammoth 272,000 barrels of oil gushed onto the ice only last March.

That spill is currently under criminal investigation and spurred the inspection that caused the latest shut down.

As a result only one of BP's three transit lines on the North slope is operational and providing crude.

Sarcastic industry watchers were heard to say yesterday that BP doesn't stand for "Beyond Petroleum", but that it really stands for Big Problems.

This would somehow be comical if it wasn't so serious.

The Alaska Department of Revenue estimates that $4.6 million per day will be lost to the state. Alaska State Rep. Mike Chenault, House finance co-chairman, commented that, "it could start to have a disastrous effect on the state as early as today."

But Alaska is not alone. There is plenty of pain to go around.

This pipeline is responsible for 400,000 barrels of oil every single day. This is massive. 400,000 barrels of oil can fuel the entire nation of Norway for 4 days straight. It can meet the US military's daily oil needs.

So this crisis is really a crisis.

Industry analysts predict that gas prices could rise as much as 10 cents based upon the incident.

That giant sucking sound you hear is not some gaping hole in the rusty pipe, but more of your money leaving your wallet.

BP America Chairman and President said in a prepared statement that, "We regret that it is necessary to take this action and we apologize to the nation and to the State of Alaska for the adverse impacts that it will cause."

A Congressional investigation into the matter will likely make the Chairman more sorry.

All of this, of course, simply underscores how thin the margin for error is in world oil markets as suppliers struggle to keep up with demand.

Think about it.

It wasn't unrest or terrorism or war that knocked 400,000 barrels of oil off the market but something as simple as a rusty pipeline. And that single but simple event was enough to send world oil markets to new highs.

This news, of course, couldn't have come at a worse time.

These markets had already been spooked by a series of events in Nigeria, Africa's largest producer.

Late last week it was learned that several foreign oil workers had been kidnapped by armed gangs in Nigeria's oil rich southern delta.

These attacks continued the pattern begun in January. Since then more than 30 foreign oil workers have gone missing in a violent pattern of unrest.

As a result of these attacks, nearly 700,000 barrels of oil a day has been knocked off the world markets. This represents nearly a quarter of Nigeria's projected daily production.

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The credit for this feat belongs to an assortment of criminal gangs, and militant groups that operate in the Niger delta.

The best known of these groups, "The Movement for the Emancipation of Niger Delta" has carried out several of these attacks. These rebels with a cause made news earlier this year when the group declared an "all out war" on foreign oil companies.

This stance virtually ensures that these attacks will continue since the Nigerian government has so far been unsuccessful in stopping these bandits.

Add to this the Iranian problem, the Venezuelan problem, the Mexican problem, the Russian problem, the Iraq problem, the Angolan problem and the Algerian problem and you can't help but conclude that it can only get worse.

Oh yeah, and don't forget the scuffle going on in Lebanon. This is a regional war in the making.

And at a current price of $77 per barrel oil is now once again priced to perfection. The perfection being that the price is just right as long as nothing else bad happens.

But what are the odds of that happening?

Rust never sleeps and neither do the world's problems.

Unfortunately, for us, there is no margin for error.

Oil is headed much higher.
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