An already fragile U.S. oil supply was dealt a severe blow on Sunday, when BP Plc commenced shutting down the biggest oilfield in the U.S., Alaska's Prudhoe Bay, which produces 400,000 barrels a day.

The shutdown was driven by discoveries of severe corrosion in oil pipelines servicing the BP oilfield. Earlier this year, a BP Alaska pipeline rupture spilled 200,000 gallons, and a criminal investigation of that incident is ongoing.

The BP field accounts for about half a percent of global oil output, and the shutdown will inevitably drive U.S. gas prices upward. The likely impact won't be huge, though, with analysts predicting a fairly modest rise of three cents to five cents a gallon. In fact, prices are likely to start falling in a few weeks, as we see the end of the summer driving season and a sharp drop in market demand.

Major price hikes are more likely to come from escalating conflict in the Middle East or refinery damage from severe storms in the Gulf of Mexico. In fact, even though oil prices spiked over $76 a barrel today, long term forecasts show prices falling below $70 by the end of the year, and to $60 by the end of 2008.

[Source: CNN/Money]

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