- The Washington Times - Tuesday, September 26, 2000

Crude oil prices fell 3.4 percent yesterday, the first trading day after President Clinton's decision to tap into the Strategic Petroleum Reserve.

Petroleum prices have fallen from a 10-year high of $37.80 a barrel in New York trading Wednesday to $31.57 yesterday, largely in anticipation of the Friday announcement. Heating oil prices dropped yesterday by 1.5 percent to 94.07 cents a gallon but remain 36 percent above last year's level.

Retail gasoline prices also declined for the first time in six weeks to $1.548 for a gallon of regular unleaded, from $1.562 a week ago, the U.S. Energy Department announced.

Analysts are skeptical that the release of 30 million barrels from the 571-million-barrel reserve over the next month will have more than a temporary effect, however, since supplies of crude and heating oil remain drum tight and demand remains high especially in the Northeast, where households rely heavily on heating oil. The United States consumes 18.6 million barrels of crude oil a day.

"It's not going to push prices below $30 a barrel," said George Beranek, an analyst with Petroleum Finance Corp., predicting that the lion's share of the price reduction in response to the release has already been seen.

"Their quick fix isn't going to work" to bring crude prices back into the $25 range sought by Mr. Clinton, he said.

One major factor pushing prices higher, even with the release, has been the winter weather outlook, he said. Prices for heating oil spiked to more than $2 a gallon last winter during a cold snap in New England, even though the winter in general was unusually warm.

That means that even normal seasonal temperatures that are cooler on average than last year will keep prices and the demand for oil high, Mr. Beranek said. The potential for price spikes is enormous if the winter proves to be colder than usual or brings icy cold snaps.

The administration's principal success in engineering a short-term reduction in prices, he said, is that it has given refineries and distributors of heating oil an incentive to build up inventories, which have dipped dangerously low in some regions and have added to the pressure on prices. Inventories in the Northeast are 65 percent lower than a year ago.

Analysts point out that U.S. refineries already are operating at full tilt and may not be able to use much more crude oil to make heating oil, gasoline and other consumer products, even though refineries prefer the "sweet" crude that comes out of the reserves because it contains fewer pollutants that have to be removed.

In addition, many of the refineries shut down temporarily in October to perform maintenance and will have to curb production, analysts say.

Unforeseen disruptions in the market, such as an oil embargo or other actions by Iraq, could send prices spiraling back toward $40 a barrel, even in the few weeks that remain before the November elections, when the Clinton administration action is expected to have its greatest impact on prices.

Iraq, the fourth-largest producer in the Organization of the Petroleum Exporting Countries, yesterday refused to rule out halting or reducing crude-oil output to boost its bargaining position in an effort to end U.N. economic sanctions, the Middle East Economic Survey reported.

"If we have difficulties, if we have shortages, if we see attacks against us, then we have to adapt our production accordingly," Iraqi Oil Minister Amer Rashid told the Cyprus-based weekly.

"If Iraq decides to play tricks, the world does not have enough spare capacity to avoid a short-term shock," said Geoff Pyne, an oil consultant with Britain's Standard Bank.

Analysts say the administration action may backfire in the long run if it gives OPEC an excuse to stop increasing production. OPEC President Ali Rodriguez announced yesterday that, in light of the administration's move, the international oil cartel, which controls about 40 percent of the world's oil, will not revisit its decision to pump only 800,000 more barrels of oil a day until the 11-member OPEC meets Nov. 12.

"Let's wait and see how OPEC's production increase and the release of 1 million barrels a day by the U.S. affects the market," Mr. Rodriguez said at the presidential palace in Caracas, Venezuela. "The market needs time and we're going to give it some time."

Mr. Rodriguez predicted the release of reserve oil beginning next month "will provoke a strong decline" in prices at least temporarily. "Winter will have the final word."

L. Douglas Lee, president of Economics from Washington Inc., said the release is likely to be successful at lowering prices and encouraging refineries and distributors to stock up on oil.

"There was a growing risk that consumers would begin to hoard heating oil as winter approached. That risk has probably been averted," he said. The release also "undercuts the impact of Saddam Hussein's saber rattling," he said.

While helping relieve the psychological pressures driving up oil prices, Mr. Lee said he doubts that the supply of heating oil will increase significantly, as the administration hopes, since refiners are operating near capacity.

U.S. Treasury Secretary Lawrence H. Summers suggested yesterday that the administration's move was aimed at popping a bubble of speculation that had developed in the oil markets since mid-September, driving prices near $40 a barrel.

"You saw a combination of factors: anticipatory purchasing and hoarding, concern about physical shortages, concern about oil markets beyond heating oil, and a psychological factor entering the market, all of which manifested themselves in a substantial upward price trend that created quite quickly a quite different oil market setting than had been there before," Mr. Summers told reporters traveling with him in Prague.

European leaders said yesterday that they may move later this week to deflate oil prices by releasing oil from their 141-million-barrel stockpile of crude oil or 206-million-barrel reserve of refined products.

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