Low demand, OPEC crude send Alaska oil prices down

ANCHORAGE (AP) -- Alaska oil prices have been taking a dive in recent weeks. North Slope crude oil was selling as low as $20.09 a barrel, making it the cheapest crude in the world.

Alaska oil is selling at a deep discount compared with other crudes because of several peculiar factors in West Coast markets. That includes increased Middle East oil flow, high electricity prices and a seasonal slump in gasoline use. Those factors have expanded supply and have caused a slump in demand on the West Coast.

In the past six weeks, crude oil prices around the world have fallen roughly 25 percent, primarily because of increased OPEC supply. But the price of Alaska oil on the West Coast has fallen farther and harder, dropping almost 40 percent over the same period.

Alaska oil normally sells for about $1.70 a barrel less than the benchmark West Texas oil. In the past two weeks, the discount stretched to more than $5 a barrel.

As the slump persists, the hope that the oil-dependent Alaska state government will balance its books this fiscal year is dimming.

Alaska depends upon oil taxes and royalties for about 80 percent of its operating budget. To balance the budget, oil prices must average about $28 a barrel through June 30.

''That $28 is looking more and more elusive,'' said Chuck Logsdon, top petroleum economist for Alaska.

West Coast markets consume about 3 million barrels daily. Alaska supplies about 1 million barrels. The rest comes from California and, increasingly, overseas.

The reason for unusually low prices in California, Oregon and Washington state, where Alaska sells its oil, is excess supply -- in particular, an influx of foreign oil.

''The bottom line is there is a lot of Middle East and South American oil in the West Coast right now,'' Logsdon told the Anchorage Daily News.

Why unusually large volumes of Middle East oil are flooding into California is unclear, Logsdon said. He speculated that tankers en route to Asia may have been diverted to the West Coast, which is an increasingly important market for Middle East producers.

Contributing to the unexpected volumes may be the start-up of Phillips' Alpine oil field on the North Slope in November. The field added about 60,000 barrels of oil a day to Alaska's 1 million barrels of daily production.

But there is a more complicated story at work.

Alaska oil is a relatively low-quality crude, heavy in weight and high in sulfur. While the price of high-quality oil, such as West Texas, remains buoyant, Alaska crude prices are slipping in a global glut of lower-quality crudes, according to traders at BP and Phillips.

''It's not just Alaska crude. All heavy oils are down,'' said Paul Langland, a BP spokesman at Los Angeles.

Why? Because much of OPEC's recent increase in production has come from heavy, high-sulfur oil, said Phillips spokeswoman Dawn Patience. The only other oil trading in the $21 range is Arabian heavy crude.

Compounding the problem is that demand at refineries and at the pump is in a slump.

West Coast crude demand falls about 15 percent every winter. The decline often is accompanied by a slight drop in Alaska prices. But the demand from refiners this year may be falling even more because of soaring electricity prices in the Northwest and California.

Refining, particularly finishing products like gasoline and jet fuel, uses lots of electricity.

Electricity prices have spiraled to record highs this month because of high natural gas prices and lower than normal water levels in Western rivers that produce hydroelectricity.

''What's happened has caused havoc for refiners,'' said Sam Van Vactor, a Porland, Ore., energy consultant.

A number of refineries have closed or curtailed operations because of high electricity prices.