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Archive for Saturday, September 23, 2000

Strategic move questioned

Releasing U.S. oil reserves may help, could hurt economy

September 23, 2000

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Releasing crude oil from the United States' vast strategic reserves probably would lower the price of oil somewhat and help to rebuild perilously low inventories of heating oil and gasoline, energy analysts said Thursday.

But like raiding the family nest egg, tapping the Strategic Petroleum Reserve, which was created by Congress in the 1970s to protect against threats to national security, carries risks that make its use as a price-dampening measure highly controversial.

Critics warn that depleting the reserves would leave the United States vulnerable to oil-supply disruptions should OPEC retaliate by pumping less oil, war erupt again in the Middle East, Iraq decide to use its oil exports for political gain or an errant hurricane damage key U.S. production facilities.

The strategic reserves, now totaling 570 million barrels of crude, are stored in huge underground salt caverns near the Gulf of Mexico.

As oil prices have remained stubbornly high in recent months, members of Congress have urged President Clinton to order loans of oil from the emergency stockpile to energy companies which then would sell the oil on the open market in the expectation that the increase in supply would bring prices down. The oil companies would replace the oil later, when prices drop, with more barrels than they borrowed.

Talk of releasing oil from the Strategic Petroleum Reserve brought an immediate negative reaction from the oil industry, which also doesn't much like Vice President Al Gore's repeated characterization of them as profiteers.

"While tight worldwide crude oil supplies have caused the cost of all petroleum products to increase, our companies are doing everything they can to supply consumers with home-heating oil, natural gas and other fuels they will need in the coming winter," the American Petroleum Institute said in a statement. The strategic Reserve "was not intended, and should never be used, to manipulate prices."

The reserve was set up by Congress in 1975, two years after the Arab oil embargo led to long lines at gasoline stations, doubled gas prices and firmed U.S. resolve to reduce reliance on foreign oil. The stockpile was tapped only once before for emergency purposes, during the 1991 Gulf War when oil hit record prices. But small swaps have been conducted since, including this summer to ease the gasoline supply shortage in the Midwest.

Those shortages were caused by regional distribution problems. The supply problem is international in scope, with inventories of crude oil and petroleum products near record lows in the United States so that any disruption in supply pushes prices higher.

But any price reduction could be offset if OPEC cuts its own production in response, as cartel officials threatened at the group's latest meeting. That Sept. 12 gathering brought agreement from the OPEC ministers to increase production by 800,000 barrels a day on Oct. 1.

What's more, U.S. refineries are already operating at full capacity to produce heating oil for this winter so that any extra supplies of petroleum would be of little use, said David Pursell, a research vice president at Simmons & Co., Houston-based investment bankers.

"Adding more oil is not going to create more heating oil," Pursell said. "Refiners are operating at capacity."

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