(FORTUNE Magazine) – This might have been a splendid year on Capitol Hill for the oil industry. The outlook for legislation permitting it to develop Alaska's Arctic National Wildlife Refuge -- the nation's most promising source of new oil, with prospects of perhaps 4.8 billion barrels -- had never seemed better. But when the tanker Exxon Valdez ran aground in Alaska's Prince William Sound, spilling ten million gallons of crude, all that changed. The circumstances suggested gross incompetence on the part of the FORTUNE 500's third-largest company. Then, with British Petroleum, Arco, Mobil, Unocal, Amerada Hess, and Phillips Petroleum, its partners in the Alaskan joint venture that shared responsibility for coping with the spill, Exxon bungled the cleanup. The disaster created a rare meeting of minds among some members of the Sierra Club and the Petroleum Club: People howled with rage. Although the spill is not connected to development of the refuge, it poisons the political prospects -- at least for now. ''Psychologically, it's a major blow,'' says Lawrence Goldstein, executive VP of Petroleum Industry Research Foundation. ''The issues are separate, but they play as one. People are going to run for cover.'' ) The urge to flee from this mess is understandable. The helmsman who ran the Valdez into a reef was the third mate, with no license to steer through those waters. The captain was below decks, and Coast Guard tests indicated he had been drinking. ''I think we made a gross error, which won't be repeated,'' said Exxon Chairman Lawrence G. Rawl. Within a few days the company had acknowledged both its responsibility for the spill and its inability to contain it. The contingency plan Exxon and its partners had filed with the Alaskan government promised fast action -- putting up booms to trap the oil within five hours, for instance -- that the companies did not deliver. Says Alaska Governor Steve Cowper: ''There was almost nothing on the scene for the first 18 hours.'' Adds lieutenant governor Stephen McAlpine: ''People feel betrayed by Exxon and the other companies.'' Alaskan oil is important to the U.S. The North Slope produces 25% of the country's oil, but the trove won't last forever. Without new sources of domestic crude, America must increase imports from the Persian Gulf, which already supplies 9% of the oil Americans use. Alaska's oil industry employs 9,000 people and pumps some $7 billion annually into the state's economy. But the Valdez spill, the worst in U.S. history, is not the first in the Gulf of Alaska and may not be the last. And a draft report by the Environmental Protection Agency states that several major oil companies, including Arco and British Petroleum, discharged wastes into the fragile North Slope environment. Says an EPA regulator: ''We're concerned about damage to the tundra.''