- The Washington Times - Friday, September 22, 2000

Vice President Al Gore's proposal to tap the Strategic Petroleum Reserve to try to force down oil prices comes amid revelations that the Clinton administration's top economic advisers have warned such action poses serious risks.
A Sept. 13 internal memo written by Treasury Secretary Lawrence H. Summers says that any large-scale use of the reserves to "manipulate" prices "poses a dangerous precedent" in opening up the reserves for political and possibly illegal purposes, while having only a "modest" effect on prices.
Mr. Summers said Federal Reserve Chairman Alan Greenspan agreed with his view that it "would be a major and substantial policy mistake," according to the memo, first disclosed in the Wall Street Journal.
The Treasury secretary primarily was knocking down an Energy Department proposal to sell 60 million barrels of crude oil, or about 10 percent of the reserves, to try to drive down prices. The president is authorized to tap the reserves only in cases of supply disruptions or emergencies. It has never been used before solely to try to influence prices.
Yesterday, Mr. Summers distanced himself from the memo, saying that under current circumstances with crude oil prices rising toward $38 a barrel, a "prudent" small-scale release from the reserves might be "appropriate" as a test.
But industry analysts said his central point was correct. They said a small release from the reserve would have no real effect on prices for crude oil and home-heating oil and that the Clinton administration would be forced to flood the market with much more oil raising substantial political, economic and legal questions.
"If it were only 5 million barrels, the market would just shrug that off," said John Lichtblau, oil specialist at the PIRA Energy Group in New York, noting that the United States consumes a whopping 18.6 million barrels of crude oil a day.
But like many market analysts, Mr. Lichtblau is reading the vice president's proposal as a sign that the administration is preparing to make a much larger infusion of oil into the markets. Mr. Gore suggested the 5 million barrels would be only a beginning, leaving open the possibility of more releases.
The government would have to sell 1 million barrels a day over a period of weeks to have any effect on prices, Mr. Lichtblau said. And even with such a sustained release, there is no guarantee that refineries that buy the government crude oil would pass on any cost savings to consumers.
The biggest risk posed by the proposal is that it could backfire if it gives members of the Organization of the Petroleum Exporting Countries an excuse to stop increasing crude-oil production after they start pumping an extra 800,000 barrels a day next month, he said.
Saudi Arabia and other OPEC members have said they will keep increasing production if prices don't fall into the $22- to $28-a-barrel range next month. They might decide not to do so if the release from the reserves temporarily lowers prices, Mr. Lichtblau said.
Talk about using the reserves helped to drive down prices yesterday from highs of over $37 a barrel to $34 on the New York Mercantile Exchange. Some analysts said that is about as far as prices would fall even if the administration takes aggressive action.
OPEC President Ali Rodriguez said yesterday that a release of U.S. reserves would send prices lower temporarily, but would do little to stabilize prices. He said rising oil prices are not due to a shortage of crude oil, but to a shortage of refined products in the United States, including diesel fuel and home-heating oil.
Analysts point out that refiners are running at 95 percent of capacity and may not be able to use the additional crude supplies being offered by the administration.
"It's a silly idea," said Carl Weinberg, chief economist at High Frequency Economics Ltd. in Valhalla, N.Y. "If supply isn't meeting demand, you can bridge the gap for a while, but if reserves are too low, it won't really help."
Many economists, like Mr. Summers and Mr. Greenspan, oppose attempts by the government to manipulate prices. While crude prices have been uncomfortably high, they say these levels probably are temporary and may be needed to induce oil and gas companies to undertake costly drilling projects to increase supplies.
While having little effect in the long run, economists say using the reserves to manipulate world oil prices creates a dangerous precedent for the government.
Legislators from Northeastern states, where consumers face big increases in home-heating oil prices this winter with possible shortages, have been urging President Clinton to release the oil, arguing that their constituents are facing an emergency that justifies use of the reserves.
"No heat in your home? That's a crisis to a family," said Sen. Charles E. Schumer, New York Democrat. He said he expects Mr. Clinton to authorize the oil sales after a meeting of world finance ministers in Prague this weekend.
Energy Secretary Bill Richardson indicated that the administration believes the shortage of winter heating oil in the Northeast constitutes an emergency that Mr. Clinton could cite as a reason for tapping the reserves. He said lingering questions may prompt the president to decide against it, however.
Any release from the reserves is likely to be offered to refineries through a bidding process. Companies that win possession of the oil would promise to return that amount, plus an additional premium, to the government in the future when oil prices are lower.

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