Bush Policy on Oil Reserves Limits Options

The peak point of view suggests that US Oil reserves may well be needed to maintain our military abilities. I’d bet Bush and Cheney feel the same way. But pressure is mounting for GWB to open the taps, as in this Bloomberg story (that reads a bit like an editorial)

Aug. 23 (Bloomberg) — President George W. Bush’s policy of adding crude oil to U.S. stockpiles and his criticism of past decisions to draw on reserves to cut prices leaves him with one less option as oil nears $50 a barrel.

Bush as a candidate four years ago reproached President Bill Clinton for tapping reserves six weeks before the election. White House spokesman Scott McClellan on Friday said reserves should not be used to “manipulate prices for political purposes” and repeated administration comments that only a serious supply disruption justifies using government oil.

“The closer we get to election day, the more any effort to use the reserve would be viewed as strictly a political ploy,” said Robert Ebel, chairman and the energy program at the Center for Strategic and International Studies in Washington. “I don’t think they could do that.”

Crude oil touched $49.40 a barrel Friday, the highest in the 21 years the oil contract has traded on the New York Mercantile Exchange. Oil futures reached records every day but one so far this month. The U.S. stock market dropped to its low for the year on Aug. 12, partly on concern energy prices will slow the economy, and more economists warned of damage from high energy prices last week.

The 52 percent rise in crude oil prices in the past year may increase the political damage Bush, 58, faces for building up the oil reserves. Senator John Kerry from Massachusetts, Bush’s Democratic rival in the November 2 vote, seeks to paint the administration stance as part do-nothing policy that is squeezing consumers.

`Under Pressure’

“Bush doesn’t want to do it but the high prices are putting him under pressure,” Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said in an interview.

Airlines, truckers and United Parcel Service Inc., the biggest package delivery company, are asking for government oil to be used to ease prices.

“We encourage the Bush administration to do anything possible to bring down this extraordinarily high price of oil,” said James May, president of the Air Transport Association in Washington, the trade group for the largest U.S. air carriers.

Airlines have been asking since early 2003 for the administration to either release oil from the reserve or stop filling it, May said in a phone interview.

Suspending deliveries into the salt caverns along the Texas and Louisiana coasts where reserve oil is stored would free up about 125,000 barrels a day in a world market consuming 82.2 million barrels a day.

Bush and Clinton

The Bush administration deferred delivery of 5.3 million barrels of oil in December 2002 when a strike shut the oil industry in Venezuela, the third biggest OPEC producer. Bush also authorized release of 296,000 barrels when a hurricane in October 2002 cut supplies to a refiner.

The last significant release from the stockpile came when Clinton authorized drawing 30 million barrels. Oil prices fell 18 percent from Sept. 22, 2000, the day of his announcement, to the end of the year.

At the time, Bush called Clinton’s move a “bad idea” designed to help Gore’s presidential campaign.

The reserve holds a record 666.5 million barrels, and Bush’s goal is to fill it to its capacity of 727 million by next summer. President Gerald Ford signed legislation creating the stockpile, formally known as the Strategic Petroleum Reserve, in 1975 following the Arab oil embargo of 1973-1974.

The President can draw down the entire reserve to counter a “severe energy supply interruption,” according to the U.S. Energy Department’s Web site. Use of up to 30 million barrels is allowed to reduce the impact of a shortage. The maximum flow out of the caverns is 4.3 million barrels a day.

`Protection’

“The reserve is for the long-term protection of the American people, not to cut the price of gas by two cents,” U.S. Energy Secretary Spencer Abraham said in June. Adding oil to the reserve strengthens the U.S. position in the war on terrorism, according to the Bush administration.

Releasing oil from the reserve “would have an immediate impact to lower oil prices,” said Robert Costello, chief economist for the American Trucking Association, a trade group in Washington. “Fifty-dollar-a-barrel oil is way out of line with market fundamentals. The price should be at least $10 a barrel less.”

The association, which represents companies including Yellow Roadway Corp. and J.B. Hunt Transport Services Inc., the two biggest U.S. truckers, asked in March for the Energy Department to stop adding to the reserves.

United Parcel Service Inc., the world’s largest package- delivery company, supports a suspension of oil deliveries into the reserve until prices fall, company spokesman David Bolger said in an interview.

Economic Shock

UPS has added a fuel surcharge to all packages it ships by air. U.S. airlines have tried and mostly failed raise ticket prices to reflect their fuel costs. Every $1 increase in the price of a barrel of oil adds $425 million annually to airline costs.

Economists at Lehman Brothers Inc. in New York cut their growth forecast last week. Stephen Roach, chief economist at Morgan Stanley, said the rally may constitute an “oil shock” that could bring on a recession.

Other oil shocks of the past thirty years include the Arab oil embargo in 1973; the loss of Iranian supplies because of the overthrow of the Shah and the war with Iraq, starting in 1979; and the disruption caused by Iraq’s invasion of Kuwait in 1990, which caused the highest oil prices prior to this year.

Should the Bush administration temporarily suspend shipments to the reserves, it would be “a sign that they are serious about bringing fuel prices down,” May said.

Effect on Prices

To be sure, the effect on oil prices of a change in policy by the Bush administration is subject to debate.

Drawing on oil stocks would “absolutely” lower prices, said Bill Wallace, a broker with MAN Financial Inc. in New York. “There’s plenty of oil sitting in caverns all throughout the Gulf Coast,” Wallace said in a television interview.

Oil producers have said there is no shortage of oil on the market. Saudi Arabia, the world’s largest oil exporter, said on Aug. 11 that it could produce 1.3 million barrels a day over current daily output of 9.3 million barrels.

“Saudi Arabia has not seen an increase in demand,” Nail al- Jubeir, spokesman for the Saudi Embassy in Washington, said in an interview.

Oil prices have climbed amid concern that excess oil production capacity is mostly in use, leaving little cushion in case of supply disruptions. Violence in Iraq has added to the gains, as fighters loyal to Shiite cleric Moqtada al-Sadr have targeted oil facilities and cut exports the past two weeks.

“We see that the market is relatively balanced,” Raul Cardoso, European representative for Petroleos Mexicanos, or Pemex, the Mexican state-owned oil company, said in a telephone interview. “This is not an emergency.”

MAN Financial’s Wallace agreed. Presidents from Ford to Bush have generally been loathe to use the strategic petroleum reserve to lower the price, he said. “That’s not the spirit in which it is intended.”

Bloomberg News