Could BP’s Problems Lead to $300 a Barrel?

Matthew Simmons is well known within the industry for his predictions on peak oil. He first shot to prominence by arguing that Saudi Arabia was running out of oil and had inflated its reserves figures. His findings were published in the controversial book, Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy.

Well now Simmons is sending shock-waves through the industry again by arguing that the price of crude oil could hit $300 a barrel if BP’s pipeline corrosion crisis in Alaska turns out to be an endemic problem for the industry. Simmons believes BP’s discovery of the severe corrosion at Prudhoe Bay could be the tip of the iceberg, and is the oil industry’s “Pearl Harbour Day”.

Simmons argues that most of the world’s most strategic pipelines are 30 to 40 years old and are all likely to be corroded. Even the new ones like the BTC pipeline are dogged in controversy over corrosion. “The industry cut too many corners when prices were low. For 25 years, there was not a proper maintenance programme. We backed ourselves into a system – rigs, pipelines and refineries – that rusted away,” he says.
The cost to replace this infrastructure would be huge – $30 billion for the Trans Alaskan Pipeline alone and the industry would have to half global oil flow to do it, he argues. So the oil industry, argues Simmons, is now in serious trouble: confronted with a dual problem: oil supply has “peaked” and corrosion of infrastructure.

The oil industry argues that Simmons is wrong over peak oil. The jury is still out on that one, but what if he is right about corrosion?