BP miscalculation makes for one costly mistake

By Freedom Newspapers

It certainly looks as if BP miscalculated when it came to how often it needed to perform maintenance on a pipeline leading from the oil field at Prudhoe Bay on the North Slope of Alaska. As Severin Borenstein, of the Energy Institute at the University of California-Berkeley said, that’s an internal BP problem and BP will pay a bigger price for it than anybody else. It should be an expensive learning experience.

The rest of us will pay for the mistake as well. The field provides about 400,000 of the 2.8 million barrels per day that West Coast refineries currently use. All the refineries have reserves, but if the BP pipeline is shut down for more than two weeks, they’ll have to find oil elsewhere.

Borenstein estimates the impact on the world price of oil will be about a dollar a barrel, which would translate to about 10 cents per gallon of gasoline.

When the problem is fixed — depending on other factors likely to make a bigger difference, such as instability in Nigeria, threats from Iran or problems in Iraq — the price should drift downward again.

The impact of this shock and other shocks will not be as severe as in the 1970s, when Arab countries imposed embargoes, because we don’t have government price controls on oil, according to Robert Michaels, who teaches economics at Cal State Fullerton.

Environmental regulations make the market less flexible than it might be, Michaels said, “but we seem to have learned that trying to end scarcity through price controls is like trying to cool down a hot room by putting ice on the thermostat rather than opening a window.”

The cost of reconfiguring refineries is not huge, but it’s not zero.

In the wake of this problem we may hear calls for more regulations and controls on petroleum production and marketing. That would be counterproductive. Without price controls the price of gasoline will edge up a little and then edge down when the problem is fixed.

BP seems to have permitted more corrosion in its pipes than it expected, but the petroleum market is worldwide and was adjusting as soon as the news was released.

Relying more on regulation and decree would make the process bumpier and spikier — and more expensive.