Prudhoe Bay shuts down

Last night, BP Exploration Alaska, Inc. announced that it was shutting down Prudho Bay due to extensive corrosion of the pipelines and oil leaks. This move will shut in some 400,000 barrels per day of production, roughly half of what Hurrican Katrina took offline last year. It will take several days just to shut down production completely. Some have speculated that prices could rise $10 a barrel as a result. In early trading this morning, prices are up nearly $2 a barrel.

Aggravating matters is the fact that the world is starting from a weaker postion than last year. Worldwide oil production is down about half a million barrels a day from last year. Mexico's production has rolled over into decline since last year, as well as Kuwait's largest oil field. Nigeria has lost about 300,000 bpd due to unrest in the country, Iran's production is in decline and most ominously of all, Saudi production has dropped by half a million bpd in the last year. Overall, total OPEC production is down by over a million bpd in a year, despite the fact that Iraq has regained something close to prewar production.

The Saudis have so far denied that their production capacity is in decline, explaining the drop to "declining demand." The next few months will be a serious test for the Saudis. If they cannot stem the decline in the face of the Prudhoe Bay shut in, then they are almost certainly past peak production--and likely so is the world.