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High oil prices reignite calls to tap reserve

WASHINGTON—After three decades, the nation's Strategic Petroleum Reserve will finally reach near capacity in August at 727 million barrels. The Bush administration has quietly filled it as a buffer against severe oil-supply disruptions, but some say tapping it now could deflate skyrocketing gasoline prices.

The reserve, in underground salt caverns in Texas and Louisiana, was created in 1975 to provide an emergency stockpile in case of supply problems from the Organization of Petroleum Exporting Countries.

But now, with oil prices settling in around $60 a barrel due to speculators and high demand, there are calls for President Bush to release some of the reserve's oil onto world markets. The logic: More oil satisfies demand and lowers prices.

"American families have been pickpocketed by OPEC all year. Now that the summer high travel season has started and our Strategic Petroleum Reserve is filled to the brim, President Bush should tap the reserve to lower gasoline prices," said Sen. Charles Schumer, D-N.Y.

Doug Steenland, the chief executive officer of Northwest Airlines Corp., shares that view.

On July 1, he told shareholders at the company's annual meeting that the Bush administration should stop filling the reserve—which only adds to demand—in order to hold down fuel prices. His comments echoed those of other airlines: Delta, United, US Airways and Continental all cited high oil prices this month in raising airfares by $100.

Would releasing oil from the reserve really affect global prices? Experts disagree.

"It would help drive down prices, at least in the short term," said John Kilduff, an energy analyst at FIMAT USA in New York. "We're in a position right now where we need every available barrel (of oil), but the administration has been steadfastly against using the reserve to affect that. At the very least, they should at least stop filling it while at these high price levels."

Since the reserve was created in 1975, most presidents have been reluctant to draw it down to influence world oil prices. Clinton was the exception. In September 2000, as oil climbed toward $40 a barrel, he announced the release of 31 million barrels from the reserve. Prices tumbled from $37 a barrel to $30, before eventually rising again.

"In 2000, it took the froth out of the market. I think a similar thing would happen here," Kilduff said. "Whether it would be enough to break the back of the overall environment is open to question."

Gene Sperling was Clinton's chief economic adviser during the boldest attempts to influence global oil prices. The experience taught him that tapping the reserve to challenge pricing is fraught with risk and should be done sparingly if at all.

"I think it's important that the U.S. look like it has some bullets in its gun that can be used," he told Knight Ridder recently. "But if you fire them and the perception is that you've been ineffective or powerless, there is the potential it could hurt confidence more than maintaining a strong position where the market believes you still have the power to intervene in an emergency."

Many experts doubt that prices would fall if the reserve were tapped. U.S. commercial inventories of crude oil—companies' own stockpiles—are near record highs. And American refineries are operating at about 98 percent capacity; they might not be able to handle much more oil.

"Whether it would have prevented us from getting to $60 a barrel is a strictly academic question. We won't know how much help it will be unless we sell from it, and I think that's almost a moot point because this administration believes it's not a good use of this asset," said Peter Beutel, an oil analyst for Cameron Hanover in New Canaan, Conn.

The White House maintains that the reserve should remain above the political and economic fray.

"The SPR is there to protect us in the event of severe disruptions of supply, like hurricanes, natural disasters or terrorist attacks. It is not there to influence price," said Dana Perino, a White House spokeswoman. She added that releases from the reserve historically have had a "negligible effect on price."

But politics is in the DNA of the Strategic Petroleum Reserve. It's been used repeatedly to influence price since President Ford established it for national security and economic leverage against producers after the crippling Arab oil embargo of 1973.

At that same time, U.S. oil production peaked and began to decline, and the United States became ever more reliant on foreign oil to bridge the gap. In 1994, the United States, the consumer of a quarter of the world's oil production, began importing more than it produced.

Today, imports are almost 60 percent of the 20 million barrels a day of oil that the United States consumes. If the reserve were emptied, refiners would have enough oil to replace those imports for about a month and a half.

President Carter tried to influence price by slowing the filling of the reserve in 1979 because of tight global oil supplies. During President Reagan's two terms, he filled it above 500 million barrels, taking oil off global markets and having the taxpayers buy it during a period when U.S. oilmen muddled through a punishing price slump.

After Iraq invaded Kuwait in August 1990, the first President George Bush stopped filling the reserve to ensure there was enough oil on world markets. Months later he ordered 4 million barrels released from the reserve during the opening days of the first U.S.-led Iraq war to counter fear-driven price spikes in world markets.

It wasn't until the Sept. 11, 2001, terrorist attacks that a real effort was made to fill the reserve. President George W. Bush ordered it filled to the brim after the attacks on New York and Washington, adding 159 million barrels of crude oil to emergency stockpiles. Capacity was 700 million barrels at the time; it's increased to 727 million as erosion deepens the caverns. Although the reserve's creators contemplated that it could replace oil imports for 90 days, its current level would replace imports for only about 59 days.

As the reserve grew after the Sept. 11 attacks, oil prices climbed too, alongside growing demand for oil from emerging economies such as China, India and Brazil.

Critics complain that Bush filled the reserve at the wrong time, when demand and prices were high and supplies tight, making oil more scarce and thus more expensive.

Crude oil traded above $30 a barrel for most of 2003, crossed above $40 a barrel last year, moved past $50 a barrel earlier this year and passed the once-unthinkable plateau of $60 a barrel this month. During this steep climb, the airline industry and other oil-dependent sectors have called on the president to stop filling the reserve in order to hold down global prices.

During a recent press breakfast, Energy Secretary Samuel Bodman said the government had "limited firepower to affect markets" by using the reserve. He doubted that a halt in the filling would've made much difference.

Traders of contracts for future oil prices, he suggested, are driving up the price over fears of a disruption in supply. At least through 2007, there's scant extra oil-production capacity to boost supplies and reduce demand.

"We are, for the first time, in the hands of traders," Bodman said. "I think it's fair to say we are in a new situation."

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(c) 2005, Knight Ridder/Tribune Information Services.

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