Energy Information Administration
A Review of Valdez Oil Spill Market Impacts
On March 24, 1989, the tanker, Exxon Valdez, ran aground, spilling 240,000 barrels of crude oil into Alaska 's Prince William Sound and sending waves of concern across the country. This concern, focused initially on the environment, quickly spread to economic anxieties over possible supply disruptions and rising prices. Based on data available through May 19, 1989, it now appears that these fears were largely unfounded. Events since the spill demonstrate that most of the impact on petroleum markets was psychological rather than physical.
As far as oil supply disruptions go, the Valdez incident should have been a minor annoyance that should have gone largely unnoticed in the market place. Yet, gasoline prices rose faster and by more than the Valdez- related crude oil shortage alone should have warranted. To understand this seemingly contradictory market behavior, it is necessary to review the events and underlying factors affecting supply and demand both before and after the Valdez incident.
The Alaskan oil spill resulted in a 13 million barrel supply disruption over 13 days (March 24 through April 6) as tanker transport was restricted and pipeline throughput from the Alaskan North Slope (ANS) was reduced. The total loss of 13 million barrels is small by national standards, amounting to about 18 hours of total national consumption of petroleum products. Since up to 10 million barrels of the 13 million total were destined for west coast refiners, the loss was more pronounced there, amounting to approximately 3.5 days of that region's product consumption. On March 29, Exxon and British Petroleum (BP) declared force majeure on April shipments of Alaskan crude oil, which amounted to a cut-back of 15-20 percent of contract deliveries for both companies.
In the 3 weeks following the spi11, west coast refinery operations were sustained by drawing down available crude oil stocks to offset ANS crude oil losses. In fact, an increase in refinery inputs occurred during the first week after the spill. As a result, stocks of crude oil in the Petroleum Administration for Defense (PAD) District V (west coast) dropped 4.4 million barrels or about 5.4 percent in the first week. However, the full impact of the 10 million barrel loss was not felt until April 14, the day that the pre-spill level of ANS deliveries to the west coast resumed (allowing for shipping time after the full resumption of the Alyeska pipeline throughput and tanker operations).
From a level of 2,522 thousand barrels per day for the week ending March 24, refinery inputs in PAD District V increased 4.8 percent to 2,643 thousand barrels per day for the week ending March 31. With the exception of a 6.3 percent drop in the first week of April, crude inputs increased steadily to a rate of 2,764 thousand barrels per day for the week ending April 21. Most of this change was attributable to seasonal factors. The increase in refinery inputs represented a substantial increase in the utilization of existing refinery capacity, which rose 4 percent after March 24--from 79.4 percent during the 4 weeks prior to the spill to 83.4 percent over the following 4 weeks.
Although the contribution of imports to crude availability in PAD District V is not precisely known, it is not uncommon for crude oil imports to rise in the Spring. Reportedly, 10 cargos, representing a mixture of crude oil and products, were retained on the west coast or moved from other U.S. locations.
Contrary to concerns raised by some groups, the volume of motor gasoline available to the west coast market increased substantially after the Valdez incident. Comparing the 2 weeks before and after the spill, finished motor gasoline supplied at the national level increased 7.2 percent while it increased 10.2 percent in PAD District V (Figures FE1 and FE2). During the same 4-week period a year earlier (1988), U.S. gasoline supplies had decreased 7.7 percent, while increasing 3.9 percent on the west coast. Specifically:
Although actual disruptions in crude oil and petroleum product supplies were relatively small and largely confined to the west coast, the accident sent shock waves throughout oil markets. These impacts were best reflected in the movement of prices in spot markets. At first, the accident itself raised the distinct possibility that all Alaskan production might be shut in, which would reduce available crude supplies from U.S. production by 25 percent. This apprehension increased later when the State of Alaska announced that it might shut down the pipeline for an extended period. The general level of anxiety was further intensified on March 30, 1989, following the announcements that Exxon and BP had declared force majeure on their contracts with ANS customers. The next day, unleaded regular gasoline spot prices in Los Angeles peaked at Sl.18 per gallon, a $0.50 increase over the pre-spill level of $0.68 per gallon (Figure FE3 and Table FE1).
Other factors contributing to this dramatic spot market price increase on the west coast were:
Peak spot gasoline prices (wholesale) in California were short-lived (with small amounts actually sold), declining from their March 31 peak to $0.99 per gallon by April 7, 1989, and to $0.82 by April 14. Thus, as fear of a long supply interruption faded, spot prices fell sharply--$0.36 per gallon in 2 weeks; they reached $0.78 on April 28 and declined further to $0.69 on May 19. At that time, wholesale spot prices of west coast gasoline had dropped well below dealer tank wagon and other wholesale prices.
Other U.S. spot gasoline markets experienced smaller price increases following the Valdez incident, due to less reliance in general in those refining regions on ANS supplies. For example, in the New York Harbor market, spot prices rose $0.08 per gallon the first week following the spill and peaked at $0.69 on April 4, up $0.12 from their March 23 level. Following refloating of the Exxon Valdez on April 5, spot prices dropped $0.06 in 2 days, before beginning a steady climb for the remainder of April, closing out the month at $0.70 per gallon. Rising New York spot market prices in April were mostly due to events unrelated to Valdez, such as substantial crude price increases, strong gasoline demand (including seasonal factors), and concern over the possibility of inadequate supplies to meet uncertain EPA and State-imposed product-quality requirements related to allowable vapor pressure levels on the east coast. In addition, most reports on Organization of Petroleum Exporting Countries (OPEC) production had been indicating reasonable compliance with the 18.5 million barrels per day ceiling, at least with respect to March production. Last, but by no means least, the gas explosion at the Cormorant Alpha platform (April 18) also buoyed prices by reducing U.K. North Sea production by 500,000 barrels per day, or 25 percent, well into May.
Following the Valdez disaster, less extreme increases in spot prices occurred for West Texas Intermediate (WTI) and ANS crude oil in gulf and west coast markets. During the week of March 27, spot prices in both markets rose approximately $1 per barrel to the $21 and $18 levels. The increase for WTI, however, was short-lived, as prices fell back to previous levels by April 3.
One impact of the spill may have been its contribution to a narrowing of crude oil price spreads in early April between gulf and west coast spot markets. On the other hand, east and west coast gasoline spot price differentials increased dramatically following the accident, peaking on March 31 at $0.53 per gallon. While this spread fell rapidly, returning to pre-spill levels by April 14, its magnitude and duration appears to have been sufficient to prompt the movement of additional gasoline supplies to the west coast from other U.S. locations. As noted, gasoline imports on the west coast also increased over this period.
Although wholesale (nonspot) and retail gasoline prices have risen throughout the U.S. in recent weeks, these movements were not significantly related to the Valdez incident of March 24. Energy Information Administration data show that price increases were noticeable in most markets well before that date. Prior to the accident, wholesale and retail price increases had been expected, due to the substantial rise in crude oil prices underway since the fall of 1988. From a low of $12.58 per barrel in October of 1988, WTI crude oil prices had increased about $7.50 per barrel (or $0.18 per gallon) by March 23, 1989, i.e., just before the Valdez incident. This increase was caused by several factors including:
Since crude oil and gasoline prices tend to move together in a lead-lag relationship, wholesale (and to a lesser extent retail) prices in many U.S. gasoline markets began increasing in January and early February 1989 in response to the earlier and very substantial crude oil price gains. The recent changes in gasoline prices appear fairly proportional to the earlier raw material increases. This may not always be the case as prices of other petroleum products, the level of refinery utilization and the strength of final demand can influence short-term price movements. It is clear, however, that earlier developments in crude markets played a predominant role in explaining recent gasoline price behavior. As mentioned, other factors included strong seasonal demand, as well as higher refining costs and reduced gasoline yields associated with the production of low volatility, high octane blends at refineries already running at high utilization rates.
To illustrate these points, several comparisons, drawn from available EIA data, follow:
In summary, since the Alaskan crude oil spill occurred at the same time that gasoline prices began moving strongly upward in most U.S. markets, following earlier notable price decreases, it appears that the temporary loss of ANS supplies contributed more to a perception of tight markets than to the underlying fundamental supply and demand factors already present, which collectively were leading to higher prices. All things considered, the total shortfall in production was only 13 million barrels, or the equivalent of 18 hours of U.S. petroleum products consumption.
Now that North Slope production has returned to its former 2 million barrels per day rate, California and U.S. markets have returned to normal operations and unusual price increases associated with North Slope production are not expected. In fact, the most recent industry reports on OPEC production (available in late May) indicate that April and May levels may exceed the 18.5 million barrels per day ceiling by 1 to 2 million barrels per day. This, coupled with the return to production shortly of 500,000 barrels per day of North Sea oil and rising U.S. crude stocks, suggests that more than ample crude oil supplies are available for the foreseeable future. The impact of the Valdez accident on crude and product supplies is over. Petroleum spot markets have fully discounted the perceived shortages and price trends remain subject to movements in the underlying market fundamentals of supply and demand.
Charles P. Shirkey
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